Credit Bureaus End Piggybacking

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.

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