When it comes to credit score, there has long been a loophole in the scoring model. Authorized users have been allowed to “piggyback” on the credit scores of others. This has been a great way to boost credit score in preparation for buying your first house, for example. It goes like this. You graduate from college, and you are ready to buy your first house. However, your credit score isn’t where it needs to be. One quick fix is to have mom and dad add you as an authorized user on the credit card they have held and paid “as agreed” for the past 25 years. As an authorized user, you aren’t responsible for the bill, but you get to piggyback on mom and dad’s solid gold credit history. Even better, you don’t even have to receive a physical card. Mom and dad can cut that up when it comes in the mail.
As you would expect, sketchy companies cropped up, promising to match consumers with sketchy credit histories with people willing to place those persons as authorized users on their credit cards — for a fee, of course. Suddenly, total strangers were piggybacking on each other’s credit histories. In June of 2007, FICO vowed to close the loophole.
The problem is that more than 50 million Americans are authorized users — most of them women and young adults. Many consumers could have seen their score disappear altogether, with their authorized user status being the only information on which to base a credit score.
So the FICO number crunchers did some head scratching and came up with a way to include authorized users in their calculation “while materially reducing any potential impact to the score from tampering.” As you would expect, how they do it is top secret. If the formula works as promised, the industry that provides matchmaking services between people with weak and strong credit profiles will cease to exist. People will have to build credit score the old fashioned way — by establishing credit and paying their bills on time.
The good news is that the authorized user loophole may still work in the way it was traditionally used — helping young people boost credit score by piggybacking on mom and dad’s good credit history. As they say, it can’t hurt to try. It’s really all upside and no downside. The worst that can happen is that the authorized user’s credit score will be unaffected. The best case scenario is a dramatic boost to credit score.
Wade Young is a Denver mortgage broker.
RSS
{ 10 comments… read them below or add one }
So the FICO number crunchers did some head scratching and came up with a way to include authorized users in their calculation “while materially reducing any potential impact to the score from tampering.”
Easier said than done. I suppose they could check addresses and last names for matches, other than that the relationship (i.e. cousin, friend, etc.) is not so readily transparent. In other words, that dividing line of ‘include or not include’ will be off by about 40 yards in either direction. And that’s on a 100 yard field where the Authorized User should be placed on the fifty.
The press release sounds like FICO posturing to me. I’d guess that if you have the same last name and/or address you are in and if not then you are out. It’s not rocket science, although they would be happy to have us believe that.
Jeez, I always agree with Wade’s positions so this feels weird. But I think that allowing anyone to use a score he or she hasn’t legitimately earned is wrong and does lenders / investors a disservice.
Just because that account belongs to a relative doesn’t mean that his/her score is your score. My Dad works for NASA. I don’t get to say that I work for NASA just because he does (and I don’t get to play with his cool rocket stuff either).
Unless that relative is co-signing on your mortgage a score derived from his/her history doesn’t make your mortgage more likely to be successful. And it isn’t the 50s. There is no reason a women in this day and age shouldn’t have a credit history of her own if she’s over 20.
The lack of credit shouldn’t derail a young adult from getting a home (although the way they hand out credit cards on college campuses it would be hard NOT to earn a legitimate credit history), but responsible lending should dictate that someone who gets a mortgage can demonstrate some experience in managing debt. Nothing wrong with asking kids to pay their dues for a couple of years.
WAMU used to have a great program for young people to legitimately “piggyback” on their parents’ (I don’t know if they still do) with 10% down and a parent to cosign. And there’s the FHA “kiddie condo” program that allows non-occupying parents to help their kids buy homes with itty bitty down payments. These are legitimate and the lender is relying on the scores of those who are actually responsible for the loan.
In the wake of all the recent credit crap I think transparency for investors should trump convenience for kids.
“Just because that account belongs to a relative doesn’t mean that his/her score is your score. My Dad works for NASA. I don’t get to say that I work for NASA just because he does (and I don’t get to play with his cool rocket stuff either). “
Gina, actually, what FICO is saying is that it DOES provide predictive value when used correctly or as it was intended and a better analogy would be the son of a professional athlete might be expected to do better in sports than the average Joe.
Truth is that the piggy back strategy has been perverted by companies that ‘for a fee’ have added people on that don’t otherwise know each other. Unfortunately, it is my sorrowful expectation that they will figure out this loophole too.
Maybe now it will be a matter of matching the surname of Smith with another Smith.
I worked for Experian as a systems consultant; the Smith / Smith thing was one of the system’s quirks that drove me CRAZY. It’s far from perfect and this is in my opinion a step in the wrong direction.
Good credit isn’t a birthright or marital benefit. How many clients have you had where one spouse had to be left off an application because of crappy credit while the other had great credit? How many times have you seen bad tradelines mixed into a good report (in error) and discovered they belonged to a parent or child? My credit isn’t my husband’s or my family’s and I don’t think it’s fair to anyone lending to me to pass it off as such.
Piggybacking is unnecessary; there are programs and guidelines for legitimate underwriting. And FHA will still give loans to those with no credit scores. the 580 limit only applies to those who have racked up some history.
I often had non-English-speaking clients with no tradelines and mattress money for their down payments. I helped them create a real credit report (using Credco) from utilities, landlords, and employers. I felt that I had an obligation to help people get loans they deserved because they had earned that right. The only kids who need to piggyback have not had to exercise the discipline of paying bills and saving even a small down payment. Those who have earned the right to borrow don’t need a free ride from Mommy.
“Jeez, I always agree with Wade’s positions so this feels weird.”
Gina — I’m not really taking a position on this as there is really none to take. I was really just reporting what is happening in regards to this issue. FICO is between a rock and a hard place. It messes things up to exclude the authorized users, but the tampering thing is a problem too.
I will point out that we aren’t just talking about mortgages. Credit score affects almost everything — even car insurance.
Paul is correct that credit score is predictive in nature. That’s all it is. It’s just a best guess. I’ll bet that “like father, like son” applies here, although I don’t have the data. My guess is that the children of people who pay their bills on time are likely to also pay their bills on time — just as they saw when they were growing up.
FICO has no doubt thought these things through and decided that including the authorized users while combating the tampering is the best they can do.
“My credit isn’t my husband’s or my family’s and I don’t think it’s fair to anyone lending to me to pass it off as such.”
Now you’re arguing with FNMA
From what I understand, this change only applies to the FICO 08 scoring model, which as I understand it, is not used/accepted by FNMA or FHLMC. So, doesn’t impact LO’s or their clients at this time.
Paul’s link to FNMA’s policy on Authorized User accounts obvously does.
Gina – According to Craig Watts, of Fair Isaac, from a Chicago Trib article about a year ago, “We were fine with authorized user accounts so long as it was someone within the household who was learning credit management skills at the same time.”
Source: http://www.chicagotribune.com/business/yourmoney/sns-yourmoney-0715gettingstarted,0,3042820.story?coll=chi-sportsnew-hed
Per Fannie Mae, authorized user accounts are “taken into consideration” when “an applicant is an authorized user on a spouse’s credit report tradeline, and that spouse is not an applicant in the mortgage transaction.” I looked up the underwriting guidelines to see what “taken into consideration” means and found that the underwriter can give the borrower the benefit of the history only:
“If another borrower in the mortgage transaction is the owner of the tradeline; or
• The borrower can provide written documentation (e.g. canceled checks, payment receipts, etc.) that he or she has been the actual and sole payer of the monthly payment on the account for at least 12 months preceding the date of the application.”
And DU doesn’t consider authorized user payments and underwriters only have to within the very narrow circumstances described above; it sounds like Fannie Mae agrees that unless you have truly used an authorized user account to earn a positive tradeline you don’t get to count it.
I stand by my position that piggybacking from a relative is no different than buying a tradeline from a company you rightfully describe as “sketchy” if the sole purpose is to misrepresent your credit history.
And FICO seems to agree. As Chris pointed out, “someone within the household who was learning credit management skills at the same time” is okay. That’s not the same as artificially boosting a score, trying to mitigate a score that isn’t “where it should be” to use Wade’s words. In that case, the college grad clearly hasn’t learned credit management skills and isn’t using the authorized user strategy to do so.
Finally, Wade says the goal of FICO reform is that “people will have to build credit score the old fashioned way — by establishing credit and paying their bills on time.” I’m all for that. That’s why I don’t believe that authorized user tradelines should be used to calculate credit scores, regardless of who the “authorizer” is. It’s the intent that matters, doing the right thing for the right reason. And trying to quantify intent is probably beyond the scope of most computer programs, however sophisticated.
Gina, the point of my FNMA and AU link was to show that FNMA WILL allow an automated underwriting approval for a borrower who has a spouse’s AU account IF the AU spouse is on the loan.
Otherwise it has to be a manual U/W.
Given that the purpose of the AU is to improve the credit score and that a DU approval uses that score in evaluating the borrower, then intuitively FNMA has found favor with the spouse & AU relationship because they are permitting the score to be utilized through DU.
Of course FNMA is not perfect as they lost $2.3B last quarter.
The reality is that the only thing FICO could actually do is disregard the authorized user accounts completely. Since this would lower scores (in many cases) – banks pushed back because it would cost them loans. So FICO caved.
Now Fair Isaac is seriously scrambling – since disregarding authorized users was the whole reason behind the new scores. Their new position is that the new score will some how reflect “legitimate” authorized user relationships (child, spouse, etc) and remove “fraudulent” authorized user relationships (”rented tradelines) from the scoring model. Yet when pressed by an American Banker reporter they couldn’t explain how they could do it.
In my opinion the reason is they simply have no way of doing it. We’ve analyzed these data and its not feasible to mathematically discern whether an authorized user relationship is legitimate or not. Further, this approach fails theoretically because it forces the FICO score to do what it was never intended to do. The three digit score is a reflection of borrower risk based on the payment history within the file. To attempt to introduce a type of “fraud” detection result within this same three digit score would require no small adaptation by automated underwriting systems.