Fair Isaac Corporation has had a change of heart.
The creator of the FICO credit score had planned to roll out its new FICO '08 scoring system this year. Among the changes in this new version: banning "piggybacking," the process by which consumers with no credit or poor credit can benefit by being added as authorized users to the accounts of credit cardholders with good or excellent credit. Piggybacking was often used by parents to give their children a head start in building a good credit history or by a spouse trying to help their partner improve his or her score, but came under intense scrutiny after private companies started to profit from a business model that boosted credit scores of those who were paired with someone with good credit. Lenders were outraged by the practice, saying it dramatically increased their risk.
It is estimated that more than 50 million U.S. consumers are legitimate authorized users on another person's credit card. The new provision would effectively lower credit scores for millions of consumers, forcing them to pay more for everything from mortgages to car loans. And since about 1% of consumers would no longer have enough of a credit history to get a score at all, according to a survey by Credit.com, those consumers may not qualify for a loan at all.
Another concern dealt with regulatory issues. Lenders must comply with the Equal Credit Opportunity Act, which requires them to consider a spouse's credit history when weighing a potential borrower's credit risk. They warned Fair Isaac that such a change would prohibit them from using FICO scores if they wanted to be compliant with the ECOA.
At a recent Congressional hearing, the company announced that "after consulting with the Federal Reserve Board and the Federal Trade Commission earlier this year, Fair Isaac has decided to include consideration of authorized user trade lines present on the credit report." In a company press release, they state that their scientists have discovered a way to restore authorized user credit accounts to the calculation of FICO '08 scores while making it "much hard to game the system." No further details were provided regarding this technology.
To accommodate this change, the phased rollout of FICO '08 has been halted temporarily. It is not clear when the rollout will take place.
