Like it or not, many investors’ credit scores are about to change—and not necessarily for the better. In the interest of protecting the credibility of the FICO credit scoring model, its creator, the Fair Isaac Corporation, has altered the scoring system to no longer recognize credit card accounts for authorized users.
People have long used the strategy of being added as an authorized user on someone else’s long-standing account to quickly raise their credit score. Authorized users are not responsible for payments and do not earn credit but still get the full benefit of the account on their credit report.
This trend, also known as “piggybacking,” has recently begun to be exploited commercially. A few companies are violating the Credit Repair Organizations Act by charging hundreds to thousands of dollars to make individuals with poor credit authorized users on accounts with good credit lines, according to Credit.com. This means increased risks for banks and other lenders, who could unknowingly be taking on high risk borrowers with artificially inflated credit scores.
Securing a spot on an account with good credit can cost up to $900, while those with good credit can net as much as $100 for renting a spot to an authorized user, according to MSN Money.
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“Consumers…stand to lose with the change, namely those for whom authorized user accounts were designed: college students on their parents’ cards and spouses with little to no credit of their own,” according to MSN Money. “There’s no way to distinguish these from…strangers trying to augment their scores. Lenders who want to find out more information about others on credit card accounts are hindered by the Fair Credit Reporting Act and privacy laws.”
Some 30 percent of the 165 million consumers with calculated credit scores have authorized users on their accounts, according to CreditCards.com. It is expected that these authorized users will see their credit scores significantly lowered or disappear completely once the new system is in place.
One of the three major credit reporting agencies—Equifax, Experian or TransUnion—will begin using the new scoring system in September. The remaining two agencies will receive the system sometime in 2008, according to the International Business Times. Fair Isaac did not announce when each agency would shift to the new scoring system.
Authorized users shouldn’t see the full impact of the changes until the system is adopted by all three bureaus in 2008. Lenders typically take the middle of the three scores, and since two of the three bureaus will still report the old credit score, widespread effects from the change won’t be immediate. But many companies only use one of the three scores and base their decision entirely on that, so if they happen to pull it from the bureau adopting the new system in September, potential borrowers could be out of luck.
While Fair Isaac may have succeeded in solving the problem of artificially inflated credit, companies such as Over720.com have found another loophole to exploit. The company offers users a guaranteed credit line of up to $10,000, which allows users to purchase items or gift certificates from the company’s online store. Part of the trick lies in giving users large credit lines they will never fully use in order to maximize credit scores. Customers can purchase products by paying 50 percent cash while the remaining balance is placed on their credit line. Monthly payments for the credit line are then automatically deducted from the user’s bank account.
Over720.com does not actively advertise their online store; they advertise the guaranteed credit line and credit building, using the online store as a way to legitimize the business. Over720.com requires an up-front purchase of between $99 and $599, depending on the size of credit line, and then minimum monthly purchases of $9.99.
It looks like FICO may have another battle on its hands.