Credit piggybacking may get harder to do

WASHINGTON — The days may be numbered for dozens of Internet-based companies that promise to quickly boost FICO credit scores by 200 to 300 points.

Fair Isaac Corp., developer of the widely used FICO score, soon plans to introduce key changes designed to derail schemes that transplant high-quality credit-card histories into the files of people with low FICO scores.

The credit-boost companies, easily found on the Web by searching for "rent a credit tradeline" or "rent a credit card," claim they violate no federal laws and are not seeking to defraud mortgage lenders.

But mortgage-industry groups, federal and state regulators and credit-industry leaders say the programs represent significant threats to the home-lending system — opening the door to fraudulent home-loan applications.

Using a FICO-boost service, a mortgage applicant with a history of late and missed payments and a low FICO score in the 500s, for example, could puff up his or her score well above 700 and be eligible for the best interest rates and fees.

How could that happen? Check out the online pitch of one promoter: "Rent your credit and earn thousands," it proclaims. The company offers credit-card holders with sterling payment histories on cards with high balances "as much as $10,000 a month or more" simply by accepting unseen borrowers with poor credit backgrounds as "authorized users" on their card accounts for 90 days.

Though the add-on users receive no actual access to the credit card and cannot rack up charges, Fair Isaac's current FICO model allows the cardholders' excellent payment histories to flow directly into the credit files of all authorized users on the card. The addition of the high-quality credit quickly raises the scores of any authorized users — even though the add-on user may still be a poor credit risk and is highly likely to default.

Authorized users traditionally were cardholders' children, close relatives or friends — people who had little experience with the world of credit and insufficient histories to generate FICO scores. Many parents allow their high-school and college family members to tag onto VISA or MasterCard accounts as authorized users to help them learn about and build their credit skills.

But under federal law, there are no limits on who can become an authorized user or on the number of potential authorized users. Nor are there bars to treating payment histories as financial commodities and renting them out.

One Web-site promoter claims that some cardholder "investors" are "able to accommodate as many as 99" authorized users simultaneously and have "as many as 22 qualifying cards" for rental, creating "thousands of dollars per card" of extra income monthly.

Fair Isaac, worried that its credit-scoring system is being gamed to facilitate fraud, is preparing a crackdown. Starting this September, according to Craig Watts, public-affairs manager, the updated version of the FICO software available to lenders — the "FICO '08" model — will no longer consider authorized-user accounts in computing credit scores.

That, in effect, will block holders of good credit from renting their account histories to authorized users to artificially boost scores. Watts said that once fully implemented, Fair Isaac's change should eliminate much of the problem.

However, some credit experts say there could be a downside: Children and other legitimate authorized users no longer will get the benefits of their sharing of their parents' or grandparents' high-quality credit DNA. Their FICO scores will be depressed or might even disappear in some cases.

As an illustration, a college student with little credit history on file might get a 100-point increase in her FICO score by virtue of being an authorized user on her mother's VISA card with perfect payments stretching back to the 1980s. That 100 points, in turn, might lower the student's cost of auto-insurance premiums, help in job applications and show her to be a credit-worthy potential tenant when she seeks to rent an apartment.

If FICO-score calculations ignored all authorized-user accounts, however, the student's score could be 100 points lower.

Terry Clemans, executive director of the National Credit Reporting Association, said that while he understands "Fair Isaac's need to solve the [application-fraud] problem, I would think there must be some less drastic ways to filter out" legitimate authorized-user accounts from the new breed of rented credit-card accounts.

Credit-card companies also need to get involved, Clemans said, and "should not approve authorized-user accounts" where the cardholder is clearly participating in some form of rental scheme for profit.

Bottom line: If you depend on an authorized-user account to elevate your FICO score — whether legitimately or with fraud in your heart — don't bank on it after September.

Kenneth R. Harney: kenharney@earthlink.net