I had written previously about renting out your credit score, which takes advantage of a loophole in the credit score formula and allows people with poor credit scores to pay others with excellent credit so as to be added as an authorized user. This currently legal act can boosts a poor credit score as much as 200 points, and is most commonly used to obtain a lower rate on their mortgage loans. As you might expect, lenders aren’t too happy about this.
According this AP article ‘Piggybacking’ Roils Credit Industry, this has led to some potential significant upcoming changes in the FICO scoring process:
Ninety percent of the largest U.S. banks base their loan decisions on FICO scores, which currently includes authorized user accounts. However, after discussions with lenders and industry officials, Fair Isaac said it intends to announce this week that all future versions of its FICO score methodology will no longer consider authorized user accounts, said Tom Quinn, Fair Isaac’s vice president of scoring solutions.
The next version is slated to roll out in September to one of the three main credit reporting agencies — Equifax Inc., Experian Information Solutions Inc. or TransUnion LLC — with the other two agencies receiving the new version some time in 2008.
Quinn also noted that some lenders generate their own scores using authorized user accounts in their calculations, so the practice may not be easily negated.
Other consumers besides credit renters 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.
That’s too bad, I would think that there would be a better way to close the loophole. Perhaps simply make it illegal for one to accept money for adding an authorized user? That would at least shut down the websites running openly.
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I think overall this is fair change. While I think being an authorized user should count as something – i.e. someone else trusts you – I see no reason why someone else’s credit history should be added. Children should not necessarily beneift from the good credit history of their parents, unless the parents are also added as a borrower. I think overall this is fair adjustment to FICO system.
Ugh. Now I need to figure out which credit cards had my husband as a co-borrower vs an authorized user. Some were from before we were married and I seem to remember adding him was easier than I thought it should be.
While this probably is fair, it seems that “fair” causes swift action to be taken when it is in the credit industry’s best interests vs. our best interests, which takes an act of congress.
I read that article as well, then I thought about something you said in your last post. So, this from the Yahoo! article:
Once the credit card company files an updated report to credit bureaus — leading to a higher FICO score — the credit renter is removed from the account of the person allowing the piggybacking. However, the credit card’s payment history remains on the authorized user’s credit report forever, and lenders have no way of knowing how the credit borrower is related to the cardholder.
Now, this was your reply to a question I had asked in the last post:
I?ve actually asked my mom to take me off as an authorized user before because her balance were high for a while on that card and it hurt my credit score.
So YOU’RE saying that removing someone as an authorized user removes the additions to your history/score, but the Yahoo! article seems to be saying otherwise… am I missing something here?
This change comes as no surprise. Suze Orman discussed this practice on her show and asked for people to stop doing it (she’s not Oprah, so no one listened). Since my credit is totally based on my accounts (I’ve never beed an authorized user on accounts), I’m unaffected by the change. However, I do feel bad for the younger home buyers that are responsible, but don’t have an old enough credit history to get a low rate.
I think the idea of parents vouching for their kids works because you can allow the child to have some credit, but the parent keeps an eye on the account. While people can still do that, it increases the likelihood that the young person will have to open up a credit line (or more) for themselves simply in order to start building credit.
In the end, the whole point of FICO is to measure default risk. If used in the parent/child or spouse context, such a relationship does affect the risk as the authorized user is indeed less likely to default on his/her debts. But, on the flip side, such selling of credit scores does undermine FICO’s purpose so they should take action.
Of course, FICO continues to make it’s scoring formula very vague in order to keep it’s billion dollar market buying scores.
“However, the credit card?s payment history remains on the authorized user?s credit report forever”
This is the first I’ve heard of that. When my parent removed me as an authorized user, the account completely disappeared from my credit report. Thus, I can’t see how it could affect my score any more.
If they have changed it so that the report says “removed as authorized user” or something so that the account information does remain, then I could see the statement being true. But I don’t remember seeing that? Maybe I should get another report.
I saw that Suze Orman episode. She said that it’s bad for companies to make money off setting up piggybacking arrangements. And she’s right.
While this change may be fair, and selling your good credit may be unethical and possibly fraudulent, it is once again us consumers that will get screwed.
Already discussed here was the parent/child AU scenario, but what about spouses? My wife and I both have good credit (720+), but she has pretty much stopped using her own cards and became an AU on a few of mine that give cash back. These cards have high credit limits and low utilization and must be having a positive impact on her credit score.
She will be hit when this new formula takes effect. I don’t think anyone could argue that her being an AU on my cards, using them, and helping to pay them off would make it unfair for her to benefit from the history of those accounts.
Once again the people behaving responsibly get screwed. And while I do find the selling of one’s credit history to a total stranger to be unethical, I blame FICO more for using this as a pretext to change the rules to the game. Ultimately, it is way to lower our scores in an attempt to charge us higher rates and additional fees. And that is also unethical.
I personally don’t see a problem with the FICO change.
I was surprised to learn that authorized users got the benefit of the primary cardholders credit score to begin with. If someone wants to build up their credit score, do it the right way and earn it.
I saw that Suze Orman episode too. Suze Orman makes huge bank off selling FICO scores. She needs to pretend like the secret formula is really important and explain why FIC can arbitrarily change the formula when they feel like it and charge way too much money to get the new scores.
I like Suze Orman, but I hate Fair Isaac. FICO is a giant rip-off—a company selling information about me to companies with which I want to do business. The way Suze Orman presented was as if poor little Fair Isaac who is just trying to do the right thing is getting ripped off by people exploiting them. Nice try. FICO traffics in my data and then changes the rules arbitrarily.
@JoelW
Earning your credit score is all good, and would be just dandy in a perfect world. Problem is, we don’t live in that world.
We live in a world where a number is the single largest factor in whether I pay $300,000 [refer to Yahoo! article] extra in interest over the next 30 years on a mortgage or not. It doesn’t take into consideration a number of things… it doesn’t know about all the times I borrowed money from a friend, or from my family, and paid back on time… it doesn’t care about my credit history, long or short, in any other country… or the time I decided not to borrow at all, and pay cash… and this list can go on and on.
Point is, my FICO score doesn’t care about all these things. Yet it determines my interest rate on anything I borrow. I personally haven’t used any of these AU schemes, but I’m honestly not too keen on “doing it the right way and earning it”, with respect to a score that ignores so many things, and could cost me hundreds of thousands of dollars as a result. Sorry.
I’m curious if it matters whether your score is over 720. If you just want the best rate for everything (the lowest car loan, the lowest interest rate offered by your bank), there’s probably just one magic number that your credit has to be at — anything over would be superfluous. I mean, I wouldn’t worry about every last point on my credit score in general. Is there any point to like an 850?
Anyway, I’m glad I let me husand on my cards as an authorized user before they changed the FICO method. I was wondering why he was suddenly getting so many offers lately. Don’t get me wrong — he’s good with money in other ways — but he just was slow/late paying bills (totally disorganized) on his own cards. Since I’ve taking over paying all the bills (for like 4 years), he’s never late and on the cards we share, we charge a lot and pay quickly. I didn’t realize that authorized users get to share the payment history. Gee, I hope they never link me up with his past payment history!
Ken, I agree 110% with all you said about this change. While I understand the real problems that come from people renting out their credit scores, I do sincerely wish that there was a way for a distinction to be made when the authorized user is clearly a family member or someone who lives in the same household and not a stranger. When so many facets of our lives are impacted by our credit scores, it would be nice if things like this didn’t crop up to make things even harder for the folks that are not abusing the system.
Fair Isaac has estimated that over 50 million people (1/6 of the US population) have little to no credit score – and with this news, that number will only grow. A previous poster mentioned a few scenarios that a FICO score doesn’t take into consideration. That list of what doesn’t count towards your FICO score is a lot longer, and is pretty stunning.
You don’t get credit for paying any of the following bills on-time:
Rent, phone, cable, gas bill, electricity, oil heat, insurance, day care, cell phone, self-storage, etc. The big bureaus will find out if you’re late or miss one of those payments. But what do you get if you pay all of them on time for years? ZILCH.
The system is set up so you have to accumulate debt (credit cards, mortgage, car loan) in order to build credit. But if you don’t have credit, it’s hard to get credit. This new decision is only going to make it harder for millions of Americans to build credit.
There’s a new national credit bureau that’s trying to change things – they’re called PRBC (Payment Reporting Builds Credit). Among the many differences they boast:
*Anyone can sign up for free.
*You can view your own file as many times as you want for free.
*You can self-report your own recurring bills that ARE NOT reported to the other bureaus.
*You build a credit file and Bill Payment Score using rent, electric, cable, etc. – without having to take on debt.
*They offer an online bill pay service for under $5 a month – as you pay bills online, your payment info is reported automatically and your file grows as you pay bills.
With news that building credit is only going to get harder, PRBC offers an excellent service well worth checking out. Their website is http://www.prbc.com. Hopefully they get continued support from consumers and lenders and help change the credit industry for the better.
while this is Fair Isaac’s response to piggybacking on another’s good credit history, it is more the result of a tightening of credit we will see across the board over the next several years. In light of defaults on subprime loans/foreclosures, and the insanity of everybody and their dog getting huge lines of credit over the last 10-15 years (because money’s been so cheap to borrow and rates were kept low by the fed). This is just the pendulum swinging back, although it’s a big, unfair swing (imho) because, as others have pointed out, it punishes though who are responsible. I’m grateful that I got a decent BofA gold card when I first out of high school, because most of my credit history is from being an AU on a grandparents account, and I’m sure my score will take a big hit following this change. Regardless, this is a microeconomic response to macroeconomic factors… namely, irresponsible lending practices have led lenders to overcompensate and tighten. Good luck trying to borrow money over the next 10-15 years like you used to… the days of “no down” undocumented loans are numbered. Honestly, though, I think it’s a good thing… in a very limited fashion. Far too many unqualified people have access to huge credit lines because of inflated FICO scores. Granted, we dont’ get credit for paying things like rent on time, but far too many have been getting credit for the AU trick when they have no relationship to the person who has added them to their account.
You got it backwards. Legislation is the most heavy handed way to make a change. This is merely business trying to fix the problem themselves. If they screw it up, they are free to try fixing it a different way. Government is slow to change. The Federal Excise tax on telephones was enacted in 1898 to fight the Spanish American war. It was only repealed last year.
This is just another way for big brother to keep those down DOWN. Most people now do not have extended families, friends with great credit to AU. So there was a demand for such a supply. Now when people can be more informed on the net and do not rely on Daddys Money and his experiance with Credit they shut it down.
It’s just the old boys club keeping you out again.. Wake up people…. Ignorance is bliss but this is just down right stupidity. And those who say FICO is just being fair are the ones who already have theirs… I laugh and so should you when they try to keep you out of the next old boys Club…. This one may not effect you but the next one will.
I have mixed feelings about the policy. I am not too keen about the practice of paying to abuse a loophole to increase a credit rating, yet there are legitimate reasons why an AU should be reported. I think AU’s should just be identified as such and perhaps it should carry less weight in the algorithm.
I am 43, have had great credit all my life until I had a failed business followed by serious medical problems (I had no insurance) and I finally had to file bankruptcy. That was three years ago and since then I have a perfect payment history, but I have been paying obcene interest rates and fees for a car loan and small credit cards to get my credit back. I have a small JC Penney card and put my husband on it as an AU. That shows on his credit record.
Here is the question: I have been an AU with my own card on my Mom’s Mastercard for 10 years (she has had the account for over 20). She doesn’t use the card, but I used it for about 2 years and paid the balance every month. It does not appear on my credit record, but I think it should (even though I was not technically liable). Does anyone know how to get them to report it on my credit report? Do I write to the credit card company or the credit bureaus to request it?
argh. a few hundred/thousand bad apples makes it worse for the rest of us. now I gotta go back and change/fix/update articles which endorses using AU as a method to build up FICO scores.
although now that I think about it, if FICO scores don’t factor AU in anymore, having one extra positive tradeline in your credit history should still help your overall credit picture (if lenders use their own formula etc).
BUT, if they follow the standard, maybe lenders will start ignoring AU tradelines too.
doh!
Jenny, in order for the cedit history to show up on your report. You must give the lender your social security number.
I ‘ve been reading a lot on this topic of ethics of the AU loophole. I think on the surface, renting a credit account may, to some, sound unethical. But whats I think is far more unethical is the cycle of poverty low credit perpetuates and the ability of lenders to take advantage of this subgroup of Americans.
If you have a low credit score (620 and below), you will pay exorbant interest rates for all major household expenses: e.g. mortgage, auto financing, furniture, etc not to mention non-leased expenses that use credit scores as a determing factor such as apartment rentals, cell phone deposits and now insurance.
For the consumer, this translates into less disposable income at the end of the month. The very definition of poverty is little to no disposable income at the end of the month.
For the creditor, however, this translates into, of course, more profit.
So lets look again at who is the major opponent of AU positive impact on people’s credit score: the mortgage industry. Their argument is now that people have better scores, they are able “to qualify for loans they can’t really afford.” As I appreciate the mortgage industry’s concern, I wonder if it is misplaced. Isn’t it really the other way around? I mean, people with sub-prime mortgages can’t really afford the high interest rates or the ARM (adjustable rate mortgage) evidenced by the rapid rise in foreclosures. [Nationwide foreclosures rose by 58% last year]
For this 3-digit number to determine one’s financial well being, most Americans possess very limited knowledge about credit scoring. Lets not forget, the FICO scoring model remains an unpublished system. Additionally, it is not a high school or collegiate requirement for graduation. It is not even on the curriculum at all in the majority of our high schools and universities. But the average college student graduates with $3000 of credit card debt and not to mention student loans.
So if we are going to talk about a fair change, perhaps we could start there. Lets make credit education a graduation requirement and stop faulting the people who just need a second chance.
Jonathan,
I’m just curious, do you know anything personally about this PRBC thing of which someone spoke above?
I’ve checked it out… seems legit. You basically add your own utility bills, rent/mortgage payments, loan payments, etc etc… ALL your payments that you make on a regular basis. You add them all yourself. Then you can pay a fee for them to verify it. For example, they were charging me about $20 to verify my rent payments, and $15 to verify my electric bill payment. This can add up pretty quickly. I’ll also note that there was one payment (Cox Internet) that it didn’t give me the option to verify.
The good seems to be that you can get some sort of score/rating (not sure how this is calculateD) based on your payment history of the numerous things that your credit score doesn’t reflect. Also, I think you can check your own report (not sure about score) for free (since, I suppose, you put it together) an unlimited number of times.
The bad seems to be that it can get quite pricey to verify all your payment histories (with just 2 items being $35 for me). There also seems to be some histories that can NOT be verified (at least not yet).
The biggest drawback I’ve seen so far though, is that they don’t seem to be supported by too many lenders as yet. From what I’ve seen, a couple mortgage companies and that’s about it. Maybe I just can’t readily find an up-to-date listing. The whole self-reporting idea is fabulous I think, and it includes many things that a credit report omits, but at the end of the day, if no lender/employer/landlord/etc cares about my PRBC report/score, then what’s the sense?
I haven’t read too much about the PRBC, it definitely feels like they have an uphill battle on their hands, especially if they are charging you to verify things. I’m sure not going to pay $20 to verify my rent payment.
It seems for now to be a way for people with poor FICO scores to provide another way to show that they are creditworthy.
I’m a loan officer and I see the hoops lenders put sub prime buyers through. Most people don’t know that FAIR ISSAC or what I call UNFAIR ISSAC has 88 factors that can negatively and only 6 factors that can affect your credit postively (IS THIS FAIR). Have you asked your self why 1 month late payment can cause your score to drop thats the reason. One can have 10 years of on time payments and one 30 day late and loose 50 points. Have you ever thought of who really benefits from this –CREDITORS. First it was UNIVERSAL DEFAULT now its AUTHORIZED USERS what will be next. THe credit bureaus work for creditors they get 8 to 12 dollars every time someones credit is pulled miillons of times a day all over the US. Why would they do anything to help the public. Now that the little guy found a way to help himself lenders have stepped in. Why don’t lenders make the bureaus work faster to correct wrong information or identiy theft on reports –they love high interest. This is going to effect millions of people immediately. AMerica should be outraged with FAIR ISSAC –the modern day thieves. A NON-REGULATED industry that effects the whole Nation negatively. Ask your self who do they answer to NO ONE but lobbyist of the lenders. BE AFRAID VERY AFRAID.
My relative recently tried to add me as an AU. B of A didn’t ask for the social, Chase said they don’t report authorized users, and finally Citibank did add me, took my social, and said that they would report this to my credit bureaus. 1 out of 3 though isn’t that great. Does anybody know of any recent policy changes from any of these major banks reporting AU’s? If the opportunity is still there, clearly individual consumers should capitalize on their connections. However I’m not sure why two of the majors, both Chase and B of A wouldn’t take on a new AU’s social.
Hi all, responding to a few questions about PRBC from last week…
PRBC is a member of the NCRA and BBB – and is a real credit bureau.
Tough to know what actually is legit in the credit industry, so here’s the BBB page: http://www.bbbmd.org/commonreport.html?&isbureau=Y&bindrlog=N&bid=90028938&gid=&gen=&lid=1
PRBC has also been written about in the Washington Post several times, received a grant from the Omidyar Network (Pierre Omidyar, co-founder of e-bay), an organization “which supports institutions and structures that foster conditions for individuals to improve the quality of their lives.” PRBC also received a grant from the Ford Foundation, and early funding from Fannie Mae, Freddie Mac, Citimortgage and IBM.
Some links:
http://www.washingtonpost.com/wp-dyn/content/article/2006/09/29/AR2006092901100_pf.html
http://www.washingtonpost.com/wp-dyn/content/article/2005/09/30/AR2005093000772.html
http://www.washingtonpost.com/wp-dyn/articles/A59605-2004Feb21.html
http://www.washingtonpost.com/wp-dyn/articles/A4017-2004Jan9.html
http://www.fordfound.org/publications/ff_report/view_ff_report_detail.cfm?report_index=513
http://omidyar.net/portfolio.php
PDF – http://www.cfsinnovation.com/document/prbc_success_story_final_-_letterhead.pdf
PRBC has made many inroads on the mortgage front. A quote from the site:
“PRBC Reports comply with Fannie Mae standards for establishing the credit reputations of manually underwritten borrowers.
This means PRBC reports may provide originators with a practical way to supplement or document creditworthiness and payment histories for thin and no-file borrowers for mortgages that can be sold to Fannie Mae.”
There’s one for Freddie Mac that’s almost identical. Basically, if someone has no credit – or “thin” credit – but has paid rent and 3 bills for 12 months, they can use their PRBC Report to qualify for a prime mortgage that Fannie or Freddie would buy on the secondary market.
Some people with thin credit may be able to qualify for *some* kind of mortgage otherwise, but typically at much higher interest rates. For people with no credit, not only can a PRBC Report help them get a better rate, they might not even be able to get any mortgage otherwise.
You can build your credit file in 2 ways with PRBC:
1) The automatically reported online bill pay ($4.95/month) I mentioned in my last post.
-and-
2) Enter account info manually, including most recent bill paid and when it was due. This is free to do. When you’re ready to go for a mortgage, you’ll have to pay about $65 to get the payment info verified. You make that back in the first month with the better interest rate you’ll get. A 6% vs. 7% interest rate on a $200K 30 year loan is a difference of over $130 per month.
To be clear, PRBC is not a credit repair service, and doesn’t report to the Big 3. But PRBC can help many people qualify for prime mortgages today, and is working on extending their reach into credit cards, auto, & personal loans.
Holy camolelys, man did I gain a ton of information this evening! I’ll post more tomorrow on my thoughts about everything I’ve read so far to include some of my own perspective as to what can be done to possibly improve this situation for all of us.
Gary
Quinn has made a very bad decision for the consumers in this country. On one hand I can see what he is doing to prevent un-ethical and immoral behavors from people buying credit.
however there are very good consumers who are A/U with family members or business partners that are exceptional consumers and very responsable. What this is going to is give Quinn the chance to lower all of our scores so that the lenders that buy the credit reports from Quinn will increase our interest rates! I mean wake up people! I believe in free enterprise! Should we all be punished for what the immoral and un-ethical idiots are doing that are selling there credit? Attack them! but dont attack every consumer that is moral and responsable! Also I feel we should create legislation on this specific issue to protect the good, but also weed out the bad. This new bill we should all protect will be called “Good Consumer Protection Act”!! All in Yay please say Yay when finished with opinion. Also the Nayers.
I will be the first to Lobby on this issue to protect the Moral and ethical consumers!
It is a fact that bad things happen to good people, and it is also a fact that corporations take advantage by charging high interest rates.
If the argument is that people should not be able to piggyback on another credit, the same argument should be made that corporations should not exploit people who have had bad things happen to them due, health issues, layoffs or due to their limited skills and education, training….
Also in subprime lending 80% of borrowers are paying their mortgage payment and this fact is comparable to those who have great credit scores.
The interesting thing about this issue is that it only became a problem when good people who have had bad things happen, discovered an equalizing process that could stop these corporations from engaging in canabilism of low income consumers.
But not to worry because no matter what UNFAIR ISSAC comes up with, the driving force here is that money is being made , so there will be continue to be CREATIVE ways to get around the so called up and coming FIX that Unfair Issac may implement.
Remember $$$$ talks and BS walks, almost every time.
So Fair Isaac and the Credit Bureaus are not fighting each other in court hmmmm….
The fact is that piggybacking has been occurring for over twenty plus years and it only got to be a problem when people with low incomes got wind of how they could improve their scores…
I understand why Fair Issac should be very angry, because too many people piggybacking hinders the ability to exploit low income people by charging them a very high interest rates.
I get it now, it is okay for people earning minimum wage to use a third of every hours pay , to pay for a gasoline of gas, and it is okay for products and services to raise their prices anytime they feel like it, but it is not okay for a low income person to lower their mortgage interests rates … I get it really I do, but my question is, “Do you get it? “
ANYONE OUT THEIR KNOW THE FICO 88 SCORING PROCEDURES?
I’m just playing, you probally have to work for them to know this.
FAIR ISSAC AND THE CREDIT BUREAUS ARE FIGHTING EACH OTHER OVER PIGGYBACKING PEOPLE SO THEY ARE IN FOR ONE H..LL OF A FIGHT IN THEIR EFFORTS TO IMPLEMENT FICO 08….
Lmao you hate FICO but like Suze?
She has a deal with the parent company?
Don’t believe me?
Research.
Just because one person is sponsored by a company that you don’t buy products from, doesn’t mean you stop liking the person.
Fico has not change there formula and it is still helping with fico scores.They have reconsider the change for awhile