Fair Isaac and Co. has decided to snuff out a growing practice
of leasing out good credit to those who have no credit or have
bad credit. Lenders pressured the credit bureaus to end abuses
that risked undermining the entire credit process.This
practice, known as piggybacking has long been a favorite of
parents trying to help their children quickly build credit.
Parents simply listed their children as authorized users on
their "seasoned" credit cards so that the young adults could
quickly build a credit rating. This helped tremendously in
helping many young adults qualify for their first car purchase
or even for their first home.
Although this practice was technically legal, it did cheat
the credit scoring process by awarding credit to someone based
on someone else's credit rating. Until mid 2007, this practice
was quite common.
What prompted the action by Fair Isaac was the growing
segment of companies that brokered "authorized users" for a fee
to help people quickly repair their credit rating. This was seen
as abusive by lenders, and they demanded that the credit bureaus
make changes to the credit scoring formulas to end these abuses.
How it Worked
Companies would offer cardholders a financial incentive
for allowing an unknown person to become an authorized user
on their credit card account. The credit card had to be
seasoned, meaning that it normally had to be open for at
least 2 years, have low or no balance, and no history of
late payments. The buyer would pay up to $1,000 to be added
as an authorized user, while the cardholder would receive a
portion of that fee, usually between $100 and $200.
The buyer would not actually receive the card. The cardholder
would receive it and would agree to cut the card up. Many buyers
would piggyback on one or more seasoned credit cards in order to
temporarily raise their credit score by enough points to qualify
for better loans and better rates than they otherwise deserved
based on their credit history.
This market segment grew quickly in 2006 as word spread about
the successes of early clients. Several companies began
providing the service and many people with low or no credit
scores took advantage of this to obtain loans on new homes. As
many lenders soon found out, this practice along with lenient
lending guidelines contributed to skyrocketing foreclosure
rates. In a hurry to cut their losses, lenders demanded more
accurate credit reporting to protect themselves from future
risks.
Authorized User Benefit Eliminated
In order to restore lender's faith in the credit reporting
system and to prevent further degradation credit scoring
accuracy, Fair Isaac decided to make adjustments to the formula
that will effectively end the abusive yet legal practice of
authorized user piggybacking. This change will end the advantage
that was previously bestowed to authorized users, including both
family authorized accounts and brokered leasing of authorized
user accounts.
Fair Isaac decided to stagger the rollout of the updated FICO
formula by providing it to one credit bureau in September 2007,
and to the other two credit bureaus within the following 12
months. Fair Isaac refused to announce which credit bureau would
be first to receive the changes.
The "unfair advantage" provided by piggybacking has come to
an end. For many consumers, it eliminates a loophole that
allowed them to qualify for better interest rates, saving them
thousands of dollars in additional interest. It also makes it
harder for people with damaged credit to qualify for a mortgage
that they may not keep up the payments on. This is what lenders
most want to see, as they have been stung by rising foreclosure
rates and other defaults.
Consumers looking to improve their credit must stick with
more traditional and honest ways of
improving their credit score.
This can be done by disputing false information, paying off
accounts in default and bringing delinquent accounts current.
Consumers actually have a lot of power to
repair their credit without
using a credit repair company. It takes time and discipline, but
it can happen.
Prospective homebuyers that have damaged or limited credit
should seek the advice of a Certified Housing Counselor or an
Accredited Financial Counselor to determine a course of action.
Getting assistance now can help make qualifications easier when
the closing process begins. Contact a
counselor today for more information.
© 2004-2008 Vision Credit Education, Inc. All rights reserved.
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