An Update on Credit Score Piggybacking: Your Scores May Tumble

Last June I wrote an article entitled Is This The End of Credit Score Piggybacking? That article discussed the renting or selling of credit scores by good borrowers to fake good credit scores for bad ones. The practice of piggybacking credit has been used by parents to help their kids develop good credit scores. When accompanied by some education in the matter of building and maintaining good credit habits, this promotes the responsible use of credit.

However, the bad guys have been using credit renting to cheat the system and the credit bureaus are about to slam the door shut. Here is a brief summary from of how it works and the changes you can expect to see shortly. This came from someone at the credit reporting agency I use.

Authorized users are individuals that are added to an account without having any responsibility for the account. The most popular use is when an individual with a credit card, makes other members of the family “authorized users” on the card. The authorized users get their own cards (with their names on them) and the accounts show up on their credit reports as authorized user accounts. However, the authorized user has no actual liability for the account; if the account goes into default the creditor can only pursue the main account holder for the funds, not the authorized users. (This is how authorized user accounts differ from joint to co-signer accounts where the additional users also are liable for the account).

Fair Isaac has upgraded their scoring model to account for the fact that people were abusing the authorized user accounts to boost their credit scores. Called “Credit Renting”, individuals with highly rated credit cards were paid to add individuals with bad credit as authorized users their accounts. The authorized users would see credit score increases when these accounts became part of their credit profiles…

Fair Isaac has stated that the new model will completely ignore authorized user accounts for the purpose of determining the credit score. Fair Isaac has additionally said that approximately 30% of all individuals have an authorized user account as part of their credit profile and thus will be impacted by the change.

Fair Isaac further said that the new score model will be rolled out to one of the repositories later this year, with the other 2 adopting the new score in 2008 (they have not specified which repository will get it first). There are rumors circulating the Experian was to get the score in September of this year, but that the release has been pushed back. Neither Experian nor Fair Isaac would confirm this.

It will take some time after the new score is released before it is fully adopted by the industry. It will be up to the major lenders (primarily Fannie Mae and Freddie Mac) to begin accepting the score before it becomes widely used. Traditionally, Fannie and Freddie have been slow to accept new scores (Freddie has yet to accept Experian’s latest FICO score). However Fair Isaac and the repositories are hoping that since the new score closes the authorized user loophole, it will be rapidly accepted in the marketplace.

Note that 30% of all people have an authorized user account contributing to their score calculation. When those accounts are pulled out of their scores, those folks may experience sudden declines in their credit scores.

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