What Do You Need to Know About Credit Cards and Risk-Based Pricing?

Credit Report

When you apply for a credit card, the issuer obtains your credit report from Equifax, Experian or TransUnion. Each of these credit reporting agencies has its own method for calculating credit scores but all three companies award consumers credit scores that range from 300 to 850. You tend to have a high credit score if you keep your balances on credit cards and revolving debts relatively low. You also keep your score high if you make your monthly loan payments on or before the due date. Events such as foreclosures can cause a major decline in your credit score.

Under the terms of the Fair Credit Reporting Act and the Fair and Accurate Credit Transactions Act of 2003, card issuers have to provide you with an adverse action notice if you cannot qualify for credit due information listed on your credit report. As of January 2011, federal law requires credit card issuers to notify you if you are required to pay a high interest rate due to information contained in your credit report, such as your credit score.

Federal law requires creditors to use one of two methods to determine who should receive notices pertaining to risk-based pricing. The credit score proxy method requires banks to send notices to the 60 percent of cardholders who are paying the highest rates. The 40 percent of customers who do not receive the notice do not necessarily all pay the same interest rate but do pay a lower rate than the other 60 percent of cardholders. The other method involves using pricing tiers. If a creditor has four or fewer pricing tiers, then anyone not in the lowest rate tier must receive a notice. For creditors that use five or more tiers, the people in the lowest rate tiers do not receive notices but notices must go to at least 60 percent, but no more than 70 percent, of customers.

The federal government requires creditors to send out risk-based pricing notices to consumers to ensure that lenders do not use unfair pricing practices. You are entitled to obtain a free annual copy of your credit report from each of the credit bureaus and a high interest rate on a credit card may alert you to the fact that erroneous information exists on your credit file. If no incorrect data appears on your credit file, you can attempt to settle unpaid debts and pay down your revolving balances so that you improve your score and entitle yourself to better interest rates in the future.