Changes Could Impact Credit Score System, Loophole

Attention mortgage applicants: days may be numbered for dozens of companies that promise to quickly boost FICO credit scores by 200-300 points.

Fair Isaac Corp., the developer of the widely used FICO credit score, soon plans to introduce key changes designed to derail schemes that transplant high-quality credit histories into the files of people with low scores.

The credit-boost companies, easily found on the Web by searching for “rent a credit tradeline” or “rent a credit card,” claim they violate no federal laws and are not seeking to defraud a mortgage lender.

But mortgage brokers and lender groups, federal and state regulators and credit industry leaders say the programs represent significant threats to the home loan lending system — and open the door to fraud.

Using a FICO-boost service, for example, a home mortgage applicant with a history of late and missed payments and a low FICO score in the 500s, for example, could puff up his / her score well above 700 and be eligible for the best interest rates and fees.

How could that happen to credit scores? Check out the online pitch of one promoter: “Rent your credit and earn thousands,” it proclaims.

The company offers credit-card holders with sterling payment histories on cards with high balances “as much as $10,000 a month or more” simply by accepting unseen borrowers with poor credit backgrounds as “authorized users” on their card accounts for 90 days.

Though add-on users receive no actual access to the credit card and cannot rack up charges, Fair Isaac’s model allows a payment history to flow directly into the credit files of all authorized users - many of whom could be using it strictly to enhance their ability to get a home loan.

The addition of the high-quality credit quickly raises the scores of any authorized users — even though the add-on user may still be a poor credit risk and is highly likely to default.

Authorized users usually were cardholders’ children, close relatives or friends — people who had little experience with the world of credit and insufficient credit histories to generate FICO scores.

Many parents allow their high school and college family members to tag onto Visa or Mastercard accounts as authorized users to help them learn about and build their credit skills.

But under the law, there are no limitations on who can become an authorized user or on the number of potential authorized users, nor is there any ban on renting out payment histories.

One Web site promoter claims that some cardholder “investors” are “able to accommodate as many as 99″ users simultaneously and have “as many as 22 qualifying cards” for rental, creating “thousands of dollars per card” of extra income monthly.

Fair Isaac, worried that its credit-scoring system is being gamed to facilitate mortgage fraud, is now readying a crackdown.

Starting in September, according to Craig Watts, FICO public-affairs manager, the updated version of the FICO software available to lenders — the “FICO ‘08″ model — will no longer consider authorized-user accounts in computing credit scores.

That, in effect, will block holders of good credit from renting their account histories to authorized users to artificially boost scores.

Watts said that once fully implemented, Fair Isaac’s change should eliminate much of the problem faced by home loan lender groups.

However, some credit experts say there could be a downside:

• Children and legitimate authorized users no longer will get the benefits of their sharing of their parents’ or grandparents’ high-quality credit DNA.
• Their FICO scores will be depressed or might even disappear in some cases.
• As an illustration, a college student with little credit history on file might get a 100-point increase in her FICO score by virtue of being an authorized user on her mother’s Visa card with perfect payments since the 1980s.
• That 100 points, in turn, might lower the student’s car insurance premiums, help in job applications and show her to be a credit-worthy potential tenant when she seeks to rent an apartment.

Bottom line: If you depend on an authorized-user account to elevate your FICO score — whether legitimately or with fraud — don’t bank on it after September.

SOURCE: Arizona Daily Star