Credit Crackdown: No More Free Rides for Phantom Cardholders

Post date: Jan 28, 2010 6:44:23 AM

Tighter credit score rules will end a scam but may make it harder for youngsters to get started financially.

By Matthew Mogul, Associate Editor, The Kiplinger Letter

June 29, 2007

A crackdown on a credit score scam will have unintended consequences. Fair Isaac Corp., the company that produces the widely used FICO credit rating score, will modify its formula in September to make it harder for a high-risk borrower to improve his or her score by piggybacking on someone else's account.

A cottage industry of Internet companies playing middlemen has been gaming the system by exploiting the "authorized user" option on many credit cards to sell credit repair services to borrowers with weak or no credit histories. Firms such as InstantCreditBuilders and Seasoned Trade Lines pair people with poor or no credit histories with complete strangers who sport stellar scores.

Both names go on the account, although the risky one is just along for the ride: He or she can't use the card and often doesn't even have access to the account number. Risky borrowers pay a fee and benefit by earning a better credit rating a lot faster than they would otherwise. Being on an account for just a month or two can improve a credit score by 30 to 45 points, some of the firms say. The Web firms pass along part of the fees to the people lending their good names.

Mortgage brokers and banks pressed Fair Isaac to strip out the free riders so it would produce more accurate scores, which about 90% of all banks use to assess the risk of a loan. The disconnect caused by this deception -- between a person's artificially elevated score and what that score really should be -- is one of the practices contributing to today's subprime mortgage crisis.

College students, divorced people and immigrants get hurt in the process. They frequently rely on the current system to build up a credit history so they can open lines of credit and avoid higher-than-average interest rates. Card owners can still help by opening a joint account that grants full credit charging privileges to such people, but that carries a risk that the new card co-owner will run up big monthly bills. Another option for new borrowers is to take out credit cards secured by collateral. For example, a borrower could set up a savings account that the bank could tap if the balance on the credit card isn't paid.