PAMELA YIP
16 July 2007
The Dallas Morning News
This is a classic case of a few bad apples really spoiling things for the whole bunch.
Recently I wrote about Web sites that allow consumers with poor credit scores to "piggyback" on - or mooch - someone else's good credit record.
These companies say they can boost your credit score - for a fee - by having you added as an authorized user on the credit cards of strangers with stellar credit. This raises your credit score.
The strangers get paid based on the quality of their credit, with the promise that the new "authorized users" won't actually be able to buy anything on their cards or get any of their personal information.
The bottom line: People with bad credit can pay a fee to get better credit. If they have a history of late payments, they can get the same low interest rate as someone who always pays on time.
Lenders are screaming bloody murder over this, saying it constitutes loan fraud and taints the reliability of the credit score - the most influential determinant of whether you'll get a loan.
The uproar has caused Fair Isaac Corp., which created the dominant FICO credit score, to announce that starting in September, authorized users on someone else's account will no longer benefit from the account holder's good payment history. Fair Isaac is changing the scoring model so it will no longer consider that when calculating an authorized user's credit score.
The company's move will hurt many innocent consumers who are authorized users, a credit expert said.
"It's going to have a big impact on a lot of consumers," said John Ulzheimer, president of educational services at Credit.com, a credit-information Web site. "They're using a shotgun to kill a couple of flies. It's significant overkill."
He said a national study the company conducted last month found that 32 percent of those surveyed think Fair Isaac is making the wrong decision in eliminating authorized users in its credit-score formula.
The survey was conducted among 1,000 adults 18 and older. It found that:
§ The change will affect 30 percent of consumers, or 60 million to 75 million, who are authorized users.
§ More women than men will be affected - 61 percent of women vs. 39 percent of men.
§ 35 percent of authorized users were added to an account to begin establishing their credit history.
§ 20 percent were added to improve or rebuild their credit history.
§ 21 percent were seeking access to a charge card before they were able to have one in their own name.
"It's a mix of young people who are on one of their parents' accounts as a way to help them establish credit for the first time," said Mr. Ulzheimer, who built credit scores and worked with credit bureaus and consumers when he was at Fair Isaac. "A large percentage of them are women who have chosen to become an authorized user on their husband's credit card."
Fair Isaac's "closing the loophole implies the model is broken, and it's not," he said.
Officials of Fair Isaac said they reluctantly decided to discount authorized users in their scoring model.
"There is very little information on credit reports about authorized user account history, so Fair Isaac has very few options when it comes to addressing the problem regarding the abuse of authorized user accounts," said spokesman Craig Watts.
In the past, Fair Isaac has factored in authorized user accounts because "we found the information helped produce a more predictive credit score [of the authorized user]," Mr. Watts said, adding that the company "didn't want to have to remove that information from consideration."
"We've done so reluctantly to protect the score and enable lenders to use the score with complete confidence," Mr. Watts said.
He acknowledged some consumers will be affected by Fair Isaac's decision, but he said that will be offset by other changes the company's making to its scoring model.
"Our belief is that the majority of consumers' scores will go up at least slightly as a result of the changes we're making in the formula starting in September," Mr. Watts said.
He declined to be more specific.
Credit card issuers are also getting involved in how the industry will view authorized user accounts.
Officials at American Express are talking with Fair Isaac and the credit bureaus to see if "there are ways that [authorized user] card members won't be negatively impacted," said Desiree Fish, American Express spokeswoman.
Banks will evaluate credit scores more closely, said James Ballentine, director of economic development at the American Bankers Association.
For example, lenders can see the progression of a person's credit score so if they see that a score has jumped tremendously within a short period, that would be suspicious.
"Credit scores don't usually jump like that," Mr. Ballentine said. "It takes time to repair credit and to build a credit history."
Banks also are expected to give less weight to a person's authorized-user status when determining his credit worthiness, he said.
"Those folks will be starting anew," Mr. Ballentine said.
The three national credit bureaus - Experian, Equifax and TransUnion - said authorized-user information is excluded in calculating the VantageScore, a score jointly developed by the bureaus.
What's more, TransUnion has developed a set of "highly predictive credit characteristics" that help lenders identify consumers who may have piggybacked on someone else's credit account.
"It's not a single element," said Dina Anderson, TransUnion senior director of Analytic and Decisioning Services. "You need to look at things in combination with [other characteristics] that will bring it to those conclusions."
