ICFE eNEWS #07-17 - July 30th 2007
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Piggybacking credit may be short-lived thanks to MyFICO 

San Diego, CA. - Piggybacking credit is the term defining the practice of an individual with poor credit and low credit score is signed on as an 'authorized user' to an account of an individual with good credit. The intended result is an improved credit score, usually within three to four weeks. Sometimes adding an authorized user is within a family and usually done for convenience.

For those who are piggybacking, it can be expensive, very expensive, to rent someone else's good name and credit rating. The Associated Press recently reported about an individual with a low credit rating, "which he said was marred by two forgotten cell phone bills and identity theft," the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.

On the flip side of this coin the same AP story reported about "a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories." His FICO score is above 800 on the scale of 300 to 850." A credit card spot is the term for an authorized user, who gets a "spot" to ride piggyback on the good credit score of another.

For the owner of the good credit, the risk is all on their side according to Maxine Sweet, VP at Experian. She commented "For the authorized user, the implications are positive, if you pay the bill on time. The account becomes part of the authorized user's credit history, so it can help them by adding positive information.

The cardholders with the good credit do need to worry about the authorized user making charges on the account that you can't afford to pay. An authorized user can use the account, but they are not responsible for making payments. That is entirely up to owner of the account.
Until recently, late payments on the account appeared on both your credit report and the authorized user's credit report, hurting both parties. The good news for the authorized user is that Experian changed its processes so that no negative information is reported on an authorized user's credit report. They can build a positive credit history without risk.

The cardholder with the good credit, on the other hand, still will have any negative information about that account in their report. Essentially, you have all of the risk when you allow someone to be an authorized user on one of your accounts," Sweet concluded.
Now, MyFICO has added a new wrinkle after lenders expressed concern the practice of piggybacking could lead to greater default risks. In early June MyFICO issued this press release:
Fair Isaac Moves to Protect Lenders from Fraudulent Manipulation of Authorized User Credit Card Accounts. Company's newest FICO scoring model will ignore authorized user accounts when calculating Classic FICO credit risk scores.
June 5, 2007 - (Minneapolis, Minnesota, USA) - Fair Isaac Corporation (NYSE:FIC) today announced that it will adjust its FICO scoring formula to ensure the continued reliability and predictive power of FICO scores. This action is intended to protect lenders and FICO scores from abuse of authorized user credit card accounts by a new kind of credit repair service that sells consumer credit card histories to credit applicants in order to purposefully misrepresent the applicants' own credit history to lenders and other businesses.
The adjustment removes authorized user accounts from consideration by the scoring model in FICO 08, the newest version of the Classic FICO credit score which Fair Isaac expects to become available to lenders starting in September.
"We will do whatever it takes to protect the reliability and accuracy of FICO credit scores for lenders, and to ensure lenders can continue to use FICO scores with confidence when making their most important customer decisions," said Dr. Mark Greene, CEO of Fair Isaac. "We will continue working with lenders, regulators and others in the credit reporting industry to end deceptive Practices that fraudulently misrepresent consumer credit histories for profit."

An authorized user is a person permitted by a credit account holder to use an account, typically a family member who is managing credit for the first time. Used legitimately, authorized user account information has helped both lenders and consumers by enabling lenders to use FICO scores when making credit decisions for consumers who are starting to establish a credit history. Fair Isaac's research indicates that the next version of its FICO scoring formula will deliver increased predictive power without considering authorized user accounts.
Fair Isaac will work closely with lenders to help them implement and benefit from the FICO 08 score as it becomes available. As the company announced previously, lenders will be able to use the new version of FICO scores with minimal changes to their own operating systems. To make lender adoption easier and faster, the new scoring model will retain the same scoring range, score reason codes, minimum scoring criteria, inquiry treatment, and related model parameters as previous versions of the FICO formula. (End of MyFICO release.)
The AP story also reported the viewpoint of the National Mortgage Association. "Ginny Ferguson, a mortgage broker in Pleasanton, Calif., and a credit expert for the National Association of Mortgage Brokers, considers the practice mortgage fraud, and the trade organization is about to release a policy statement against it.

"These companies are encouraging consumers to commit fraud. On a standard home loan, there's a clause that says the consumer is not omitting pertinent facts that could impact his or her ability to repay the loan," Ferguson said."
The AP story also got a comment from the FTC. "So far, federal authorities have yet to make a ruling on the practice. "What I've gathered from attorneys here is that it appears to be legal" technically, said FTC spokesman Frank Dorman. "However, the agency is not saying that it is legal."

About the ICFE:

The Institute of Consumer Financial Education (ICFE) was founded in 1982 by the late Loren Dunton (creator of the Certified Financial Planner (CFP) designation).  The ICFE is dedicated to helping consumers of all ages to improve their spending, increase savings and use credit more wisely. 
The ICFE is an award winning, nonprofit, consumer education organization that has helped millions of people through its education programs and Resources. It publishes the Do-It-Yourself Credit File correction Guide, which is updated annually. The ICFE has distributed over one million Credit/Debit Card Warning Labels and Credit/Debit Card Sleeves world wide.

The ICFE became an official partner with the Department of Defense/Financial Readiness Campaign in June of 2004.The ICFE was an active partner in the California Student Debt Resource Awareness Project (CASDRAP) which resulted in a new web site: (studentdebthelp.org).  CASDRAP disbanded in 2010, shortly after the web site project was completed.  In 2011 the ICFE assumed the single sponsorship of the (studentdebthelp.org) web site and is now responsible for its content and operation.

The ICFE is also an on-line help for consumers who spend too much.  ICFE's spending help was featured in PARADE Magazine in the Intelligence Report section. The money helps and tips are from the ICFE's Money Instruction Book, our course in personal finance.

Visit the ICFE's other web sites at: www.financial-education-icfe.org and studentdebthelp.org.  Both sites helps consumers and students with mending spending, learning about the proper use of credit, budget and expense guidelines, how to set up and implement a spending-plan and also how to access financial education courses and how to teach children about money. Other ICFE services include: Ask Mr. G,  a free eNews, and an online resource center for students, parents and educators, plus financial education learning tools and a book store.

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