Fair Isaac has changed its mind about removing piggybacked accounts from the FICO score equation.
In 2007, Fair Isaac announced a new credit scoring model - FICO 08 - that would no longer consider authorized user accounts. This decision came on the heels of the mortgage meltdown. You see, many consumers who had bad credit scores, bought better credit scores by paying to be added to someone else's positive credit account. When you're an authorized user on an account, the account's entire history appears on your credit report and is calculated in your credit score. So, some consumers, who wouldn't have otherwise qualified for a mortgage, paid their way to application approval.
In a prepared testimony, Tom Quinn, Vice President of Global Scoring Solutions for Fair Isaac Corporation states:
"After consulting with the Federal Reserve Board and the Federal Trade Commission earlier this year, Fair Isaac has decided to include consideration of authorized user tradelines present on the credit report in the FICO 08 model. Our scientists have devised a method to consider these tradelines while materially reducing the negative impact that could arise from piggybacking."
Fair Isaac still plans to roll out FICO 08, though no dates have been communicated.
In 2007 there was a lot of talk about the end of authorized user credit also known as piggyback credit, as a means to boost credit scores. The benefits of becoming an authorized user is the primary account holder’s credit can improve the authorized user’s credit scores and help build a solid credit history. Fair Isaac Corporation (FICO) announced they were rolling out a new credit scoring model that did not factor in authorized user accounts. Traditionally authorized user accounts have been used when spouses add one another to their already established credit accounts or parents add their children to their accounts. But companies began to emerge that offered authorized user accounts for a price.
A primary account holder would allow a limited number of unknown authorized users to be added to their good credit accounts and the company would pay the primary account holder a fee for brokering these deals. Very similar to “renting out” your good credit for a limited term and getting paid for it. The authorized user would not actually get use of the credit account; however, they would get the benefits of the primary account holder’s good credit history. FICO considers this practice as misrepresenting a consumer’s credit risk to lenders. The authorized user would be added for a short period of time in order to add a quick boost to their credit scores. Some of the primary accounts would be more than 20 years old with excellent payment history and very low balances — something FICO scoring looks kindly upon. According to Fair Isaac Corporation, there are more than 50 million authorized user account holders. The industry of purchasing authorized user accounts began to get negative attention; and in response to the growing use of renting accounts, Fair Isaac Corporation developed a new scoring model that did not include authorized user accounts in the scoring formula.
FICO 08 was originally set to begin some time in 2008 and all the major credit bureaus were to begin using the new scoring model. However, critics have expressed that if FICO 08 were enforced without the use of authorized buyer credit, it would be in violation of the Equal Credit Opportunity Act. The Equal Credit Opportunity Act requires lenders to consider a spouse’s credit history when determining the credit risk of a borrower. If authorized user credit were abolished it would have prohibited lenders from complying with the Equal Credit Opportunity Act. Fair Isaac Corporation revised FICO 08 to simply FICO 8 which includes the use of authorized user accounts; however, they now say it has a way to recognize the abuse of authorized user accounts. It only made sense for FICO 8 to continue authorized user credit or “piggyback credit” because every generation of the FICO score formula has included authorized user credit card accounts when calculating a person’s score. FICO 8 score continues that policy. Authorized user credit continues to benefit consumers with shared management of a credit card account. It also helps lenders by providing scores that are based on a full snapshot of the consumer’s credit history. FICO 8 does says it “substantially reduces any benefit of so-called tradeline renting.” Stay tuned for further develops, but for now, it looks as though authorized user and piggyback credit is still a viable option in boosting credit scores.
He estimates about 1 percent of U.S. consumers, or between 2 million and 2.5 million, would have ceased to have FICO scores if FICO 08 had been rolled out the way it was.
It could be a long wait before consumers can obtain their FICO 08 scores. Quinn says Fair Isaac is still revising the model with the three major credit reporting agencies, after which the company will focus on getting lenders to test and use FICO 08. He says it's too early to speculate on when consumers will get access to their new scores.
Pros and cons of authorized users
If piggybackers were gaming the system, could people still do so by getting a family member with great credit to add them as an authorized user?
Asked about legitimate authorized users inflating their FICO scores in this way, Quinn responded in an e-mail: "The innovation we are adding to the FICO 08 model will help control for the kind of score tampering you describe. The details of how it works must remain confidential."
It remains to be seen how people with otherwise low scores will benefit from their authorized-user accounts after FICO 08 is in place.
Authorized-user accounts aren't a cure-all, though, cautions Curtis Arnold, founder of CardRatings.com and author of "How You Can Profit from Credit Cards." He says credit scores look at many factors and there are bigger components to worry about.
Authorized user accounts do impact your FICO scores, but they aren't a major factor in and of themselves. Here's a look at what influences your FICO scores:
Elements of your credit score
Being either an authorized user or a primary accountholder carries some risk. Authorized users could see their credit score plummet if the primary cardholder defaults on that account. Primary cardholders are liable for any debt incurred by the authorized user, and high balances could damage their credit scores.
Issuers must report authorized-user information when the authorized user is the accountholder's spouse, thanks to the Equal Credit Opportunity Act of 1974. Issuers decide whether or not to report payment history data for other authorized users.
Arnold suggests the primary accountholder call and ask the issuer if authorized-user data gets reported.
If the issuer doesn't report authorized-user information when that person is not a spouse, it could make sense to add the other person as a joint accountholder. Doing that, however, makes both parties responsible for debt acquired by either party.
Credit repair firms exploited authorized user accounts
Nearly 2.5 million consumers would have lost their credit scores.
Primary cardholders are responsible for authorized user's debt.
Last week Fair Isaac announced that its latest credit-scoring model, dubbed "FICO 08," will include authorized user accounts when calculating someone's FICO credit score.
The company estimates that 50 million consumers are "legitimate" authorized users on someone else's credit card. Legitimate authorized users have a relationship with the primary accountholder and a reason to share access to the account, such as spouses, and parents and children.
FICO 08 was originally designed to ignore authorized user accounts, in an effort to stem "piggybacking" on a stranger's credit card and artificially inflating one's score. (Editor's note: All previous stories describing the design of FICO 08 to exclude authorized user accounts were based on information that is now outdated. At the time of this writing, FICO 08 will include authorized user accounts in scoring.)
Previous versions of the FICO scoring model included authorized user accounts in scoring. Some credit repair firms exploited that loophole, and offered a way for folks with bad credit to raise their FICO scores. The consumer would pay thousands of dollars to get added as an authorized user to the credit card of someone with a stellar credit history. When that account showed up on the authorized user's credit report, the person's credit score would rise. Typically, the authorized user would not receive a credit card. Rather, the consumer paid to get a credit score boost.
Why the change
Fair Isaac said lenders complained that using FICO 08 would inhibit compliance with Federal Reserve Regulation B, which requires lenders assessing a married person's credit risk to consider the credit history of accounts shared by the spouses.
Fair Isaac is keeping the specifics of their new analytic approach secret but says they've found a way to restore authorized-user accounts to the formula but also reduce the impact of piggybacking.
"The FICO 08 scores of legitimate authorized users will now reflect the information on their credit reports about the account(s) on which they are authorized users," says Tom Quinn, vice president of global scoring solutions for Fair Isaac.
A competing scoring model called VantageScore, which was created by the three major credit reporting agencies, has never considered authorized-user accounts in its scoring. "VantageScore excludes authorized-user trade lines, whether with good or bad payment histories, to ensure the risk assessment of a credit applicant represents the true credit risk of the prospect and not the originating borrower with whom the authorized trade line is associated," says Barrett Burns, president and CEO of VantageScore Solutions.
Burns says VantageScore complies with Regulation B since "lenders do not have to consider the credit history of spousal authorized users unless the information is available." Credit reports don't indicate the existence of a spousal relationship between authorized user and accountholder.
How the change impacts you
Fair Isaac's announcement should please consumers whose credit history largely consists of authorized-user accounts. "The millions and millions of consumers who would've seen their scores go down are not going to see that happen," says John Ulzheimer, president of Credit.com educational services.
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