Posted by Mike Smith :: July 16, 2007 @ 7:45 amThe end of an era is upon us. Fraudulent use of other people’s credit history through the use of authorized user accounts will soon be a thing of the past. With that necessary and wonderful improvement, there are side effects that all consumers must be aware of as well.
As anyone who has applied for a mortgage, loan, or credit card can likely tell you, a FICO score is a single number that is used as a measure of your creditworthiness. Recent changes in the formula used to calculate your score will likely have an impact on millions of consumers. Fair Isaac, the company that issues FICO scores, recently announced these changes in response to growing concern over the use of authorized user accounts.
Authorized user accounts, on their surface, are not necessarily bad things. They allow a person with an established credit history to permit another person, perhaps an adult child or a spouse, to use his credit card. The added benefit of this practice has historically been that the authorized user had this account, and the potentially lengthy repayment history, added to his credit report as well. As a result, the authorized user would seem more creditworthy and his FICO score could potentially be increased significantly.
While the idea of a parent or spouse helping to improve the score of a loved one seems honorable, the same system has also been exploited in recent years. Through the fraudulent practice known as piggybacking, unscrupulous companies would charge a fee to have customers with credit troubles added as authorized users of an individual with a strong credit history. Through this method, a person could essentially sell his good credit to someone with poor credit. The person with poor credit wouldn’t actually get to use the credit card of the person with good credit, but the payment history on that card, and accompanying FICO score boost, would be added to their credit report.
The latest changes by Fair Isaac, whose implementation will begin in September and is expected to be complete by the middle of 2008, will totally remove authorized user accounts from consideration in determining the FICO score. Lending Club is pleased to see this important and necessary change occur to eliminate artificial inflation of FICO scores.
The downside of this change is that legitimate authorized users, which are likely the majority of the 60 to 75 million authorized users estimated by Fair Isaac to exist, may also see their FICO scores drop, perhaps significantly. If your credit report contains such an account, now may be the time to begin strengthening your own credit history.
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