Last summer, a little-known Internet-based company based in Florida was thrown into the national spotlight for its ability to "trick" the credit bureaus' credit scoring programs. Credit-challenged customers signed up with the company, who added them as authorized users on the credit cards of people with sterling credit. It seemed to be a win-win for everyone - the clients, who normally paid upwards of $1,000 for the service, got a boost of 30-200 points almost overnight; the original card holders were paid handsomely for allowing clients to piggyback on their good credit history. The losers? The credit bureaus and lenders.
As promised, Fair Isaac Corp., creators of the FICO credit score, will launch a new scoring model this spring. One of the major changes is the exclusion of these types of authorized user accounts from their credit score calculations.
According to Fair Isaac, 30% of the population has an authorized user account - approximately 60 to 75 million borrowers.
Since length of credit history accounts for 15% of one's total score, if the authorized account is the first (or only) type of account that the borrower has, then this new scoring model will have an immediate negative impact on the borrower's credit score by "shortening" the credit history.
This change is expected to have an especially dramatic - and negative - impact on teens and young adults who have been added by their parents as authorized users in an honest effort to help them establish credit.
One alternative to consider is making the borrower a joint cardholder instead of an authorized user, making each person equally responsible for the credit activity (payments and outstanding balance).
FICO is changing other scoring calculations as well. Points will be given for borrowers who have multiple types of credit (such as a mortgage, credit card and student loan). The thinking behind this is that borrowers who can manage various types of loans should be given greater consideration. Delinquencies also will be factored differently. The current scoring models lump in borrowers with one delinquent account with borrowers who are delinquent on multiple accounts. The new model separates these two groups.
