In an effort to maintain the integrity of their credit-reporting formula, Fair Isaac Corporation (FICO) has announced a major change to their formula to be implemented later this year.
Unbeknownst to most consumers, many unscrupulous credit repair agencies have employed a practice called credit renting. This process benefits a poor credit score client by having their name added to a good credit score account as an authorized user. The agency and account holder collect a fee and the client receives the benefit of increased credit score by association. Obviously unethical, another term can be applied to this practice. Fraud.
Since FICO is looked to by the lending institutions to provide accurate assessments of individuals credit position, they were the ones to strike the first, and probably final blow in this credit manipulation battle. In late 2007, FICO will test their new formula with one of the three major credit-reporting agencies. This undisclosed agency, Equifax, TransUnion or Experian, will install the new update to FICO’s formula and will thus stop applying any positive benefit to authorized user accounts. When the other two agencies install their new updates, probably in early 2008, the credit renting game will be over.
So chalk one up for the banks. They will have successfully banished one fraudulent activity. With a little ripple effect.
30% of the population of the United States has at least one account on their credit report listed as an authorized user. The credit accrued on those accounts will disappear. These are spouses, children and grandchildren who are about to see their credit score take a major drop. Those people about to be impacted must take quick steps to shore-up their credit before this update takes effect. Spouses will probably be the hardest hit group. It is, and has been, a very common practice to have a household’s financial activities grouped into one of the partner’s account. This update will significantly lower the credit rating of a large portion of these spouses.
To limit the ensuing damage, current authorized users should quickly establish their own credit. Since credit history is a major portion of the FICO formula, it would be well advised to open a new account with the same lending institution as the current authorized account. If required, have the main account holder commit to the new account as a co-signer. A subprime credit card or affinity card may also be a good solution for those unable to qualify for a mainstream account.
Spouses may have a unique opportunity to re-establish their own credit. When applying for their own credit card, most applications will ask for household income, the combined income of both partners. They also will probably have an occupation of home maker that can be selected. By using these items and adding the breadwinning spouse as a second cardholder, your chance of getting approved are very good.
Once again, by using an institutional hand-grenade to eradicate the pesky ant, masses of innocent people will suffer the fallout. Banks will see an almost insignificant reduction in defaulted loans while nearly one-third of the population will see their credit scores and wallets impacted.