Crackdown on 'Piggybacking' Creates Unintentional Woes

  Fair Isaac Corp., whose FICO credit-scoring model is used to help gauge lender risk, is cracking down on organizations that enable individuals to inflate their credit ratings by buying into strangers' credit card ratings. But the company's new policy banning the practice, called "piggybacking," could have broader implications, including making it more difficult for legitimate cardholders to share their credit rating with their spouses or children.
  Fair Isaac wants to put an end to credit-repair bureaus that support piggybacking. In such schemes cardholders typically can earn $100 to $200 to share their good credit rating, while the buyers can pay as much as $5,000 to capitalize on the cardholders' good credit.
  Industry officials commonly refer to piggybacking as fraud. Yet while state and federal law-enforcement agencies reportedly have been looking into the practice, it has yet to be declared officially illegal, according to experts.
  "Essentially the borrower is lying to the lender by claiming to have a better credit history than they really have," Ralph Roberts, a Washington, Mich.-based author on credit issues, says on his Web site, FlippingFrenzy.com. "The practice fools the lender into making a decision to approve a loan based on false information."
  The policy change already has had an effect. Some credit-repair shops that once promoted the sale of piggybacked authorizations for card accounts have disappeared or have become more difficult to contact. Cards&Payments could not access the Web sites for some of these companies because the sites were inoperable.
  Fair Isaac's modifying of credit scores to disqualify piggybacking "certainly addressed a need to close a loophole that was being used by credit-repair companies to facilitate credit fraud," says John Ulzheimer, president of educational services at Credit.com, a San Francisco-based provider of credit services, products and education programs for consumers. "But innocent consumers who are doing nothing wrong also are going to be affected by the change. It's guaranteed that this will have an impact on 65 million or 70 million consumers' credit scores."
  In fact, he says, Fair Isaac's new policy could result in 2 million to 2.5 million consumers losing their credit scores.
  Craig Watts, a Fair Isaac spokesperson, says about 75% of the 165 million U.S. consumers with credit reports "would be unaffected by the change." That means, by Fair Isaac's calculations, more than 40 million Americans could be affected.
  Ulzheimer says that, according to a poll by Credit.com, divorced women who no longer are authorized users on their husbands' cards could be affected by the crackdown. "If they would have known they were going to lose this [authorized-use] value, maybe they would have applied for a credit card on their own or applied as a joint cardholder," he says.
  What will change is not the credit data that are passed on from Fair Isaac to the credit bureaus, but the way the FICO score interprets that data when authorized use of a credit card is involved.
  Because the FICO-score change entails complex credit modeling, Ulzheimer worries that consumers may not know that the bureaus are changing their ratings if they ever have been authorized users on someone else's card. "The sad thing," he explains, "is you're going to have the consumer score change for the better or worse with them not even knowing it has changed."
  SOME SCORES MAY RISE
  Under Fair Isaac's new policy, consumers' scores can go up if the primary cardholders to whom they are piggybacked have poor credit standings; the unhooking of that connection would be beneficial then to the authorized user.
  Whether scores go up or down, "any change will be modest" for most consumers, says Fair Isaac's Watts.
  He acknowledges that once the score eliminates the authorized-use relationship of, say, a cardholder's son or daughter, it might become more difficult for the offspring to establish credit.
  Linda Y. Leitz, co-owner of Pinnacle Financial Concepts Inc., a Colorado Springs, Colo.-based personal financial advisory firm, agrees. "These folks got some loans and/or cards they might not have qualified for without their parents' help," she says. "The ones who benefit are the ones who have built their credit without their parents or other co-signers' help."
  Watts says Fair Isaac still will list the authorized use of a card on its reports to the credit bureaus, but it will not be calculated as part of the FICO score that credit bureaus compile for the authorized users and pass onto lenders.
  Fair Isaac routinely revises its FICO-scoring model every few years. The newest version, called FICO 08, will delete authorized card use from the formula that makes up the score given to the credit bureaus. Fair Isaac provides the formula to the three credit bureaus-Experian, Equifax and TransUnion. They, in turn, share the scoring information with their clients, which include card issuers, mortgage providers and other lenders.
  TransUnion says it already has excluded ratings of authorized users in its models for rating their creditworthiness. "We don't include authorized users," says Dina Anderson, TransUnion senior director of analytic decision services. "TransUnion's risk model never uses it, so there will be no impact."
  Watts says it is up to the bureaus when to begin using FICO 08. Once they do, then lenders can decide when to incorporate the new scoring into their own systems, a process that can take years, according to TransUnion's Anderson.
  Fair Isaac modified its scoring at the urging of financial institutions that offer credit. "We took that step because major lenders had expressed concern to us about credit-repair services that were providing piggybacking services to artificially inflate the FICO scores of applicants," explains Watts.
  Ulzheimer, who previously was a manager with Fair Isaac, asserts that his former employer was compelled to make the change because of credit card issuers' own negligence.
  "The credit card issuers have allowed this to take place," he says of piggybacking. "They're forcing Fair Isaac to modify [the credit scoring] for their lack of attention. They could have asked authorized users what relationship they had with the primary user."
  MORTGAGE IMPACT
  The effect on the mortgage market could be consequential because some authorized users of their parents' or spouses' credit cards might find they have to pay higher interest, or they may find it more difficult to secure mortgages, says Ron Litt, president of Houston-based Market Kinetix, the marketing agent for Deal Maker Score, a tool for analyzing credit in the mortgage industry.
  If the authorized use of a credit card is "the only piece of revolving credit I have, the impact of that going away is pretty significant," he says. "But if I used the credit line from a relative and never bothered to shut it down, and at the same time I developed my own sources of credit, it will not impact my score in a big way."
  Thomas Fox, community outreach coordinator for Cambridge Credit Counseling Corp. of Agawam, Mass., says it is important for the credit industry to let consumers know about the new FICO scoring model.
  "It comes back to financial-literacy education," explains Fox. "There could be a lot of people who don't even know this is happening."
  Corey Stone, CEO of Pay Rent, Build Credit Inc. of Annapolis, Md., says consumers such as spouses and children who no longer can gain credit as authorized users on card loans have alternative ways to gain credit. One method, he says, is to share a joint card account instead of simply be an authorized card user. Another is to demonstrate that they pay on time all noncredit bills, including rent, utilities, phone and cable.
  Not all credit-repair companies sell piggybacking services. Some, in fact, consider the practice illegal.
  "As far as we're concerned, it's always been fraudulent," says Jim Kemish, president of Sky Blue Credit Repair of Delray Beach, Fla. The type of companies that have sold authorized-user accounts popped up in the last five years when a subset of the credit-repair industry realized there was a loophole in the FICO scoring model, he says.
  "There's a lot of abuse going on," Kemish says.
  Fair Isaac modified its FICO scoring to crack down on strangers co-signing card applications. Enabling spouses and cardholders' children to establish a joint card account, instead of simply providing them authorized usage, might help offset the unintended effects of the policy change.
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