A pending change to a popular credit scoring system is about to make it much harder for people to polish their credit by riding the coattails of someone else's good payment record.
Fair Isaac Corp., the creator of the widely used FICO credit scoring formula, is adjusting its scoring method to fight a growing trend called piggybacking.
Piggybacking involves letting another person become an authorized user on your credit card account. As an authorized user, that person immediately inherits the payment history of that account. People seeking to boost their credit ratings typically hitch themselves to folks with histories of paying their cards on time and keeping their balances low, all of which maximizes their credit scores.
In the past, this arrangement has been between family members or friends. Parents are often advised to do it for their college-age or young adult children (a move I highly discourage).
In recent years, a growing number of companies have begun selling authorized-user services. These so-called credit-repair companies, which advertise heavily on the Internet, promise that people can push up their scores by 200 points or more. FICO scoring ranges from a low of 300 to a high of 850. The higher your score, the better the loan terms and rates you can get.
Brokers selling this service also promise that authorized users won't get the credit card number or information that could allow them to use the credit card. However, if the information is included on a person's credit report, which is the whole point of this transaction, it's possible to find a way to use the card.
There's a problem with this service. It allows people, who have no relationship with the primary cardholder, to embellish their credit histories, making it possible for them to get loans for which they would otherwise not qualify.
"This is clearly loan fraud," said Craig Watts, the public affairs manager for Fair Isaac.
Piggybacking has become a major concern to lenders and banking regulators, who are already dealing with historically high mortgage loan delinquencies and foreclosures. The damage could get worse if they approve borrowers who only have an illusion of creditworthiness.
By September, Fair Isaac will begin rolling out its new scoring model, called FICO 08. Watts said consumers relying mostly on the credit history of another cardholder could see their scores drop if the new scoring model is used. Fair Isaac estimates about 25 percent to 30 percent of credit reports have at least one authorized user.
No question, piggybacking has helped some consumers. But borrowing someone else's good credit history doesn't always have a happy ending.
I've heard my share of horror stories from people who allowed a relative or friend to become an authorized user only to be left with major debt. Or the authorized user, who was responsible for paying the bill, didn't make payments on time, thus ruining the primary cardholder's good credit name.
Being an authorized user doesn't let someone demonstrate that they can actually use credit wisely. In fact, that's why in creating its own credit scoring system, VantageScore, the three major credit bureaus never included authorized users in calculating a person's creditworthiness, according to Lisa Zarikian, who leads Equifax Predictive Sciences and was a member of the team that created the scoring system.
Although Fair Isaac is updating its scoring model, piggybacking will continue for now because not all lenders will immediately change over to the updated FICO version.
I understand the desire to want to help someone qualify for credit or get the best loan deal. But that person's inability to qualify for credit could be a good thing. Just because someone wants credit doesn't mean they can afford it. That's why they didn't qualify on their own in the first place. Maybe they aren't ready for the responsibility.
And consider this. If you never meant to allow an authorized user to use your card, you're complicit in helping someone misrepresent themselves as creditworthy. Bottom line: This is unethical whether it's being done by somebody's mama, daddy, friend or stranger.