A Credit Score You've Earned

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, the creator of the widely used FICO credit scoring formula, is adjusting its scoring method to fight a growing trend known as 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 the 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, and 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.

Users of a commercial piggyback service might pay $1,000 or more depending on the quality of the accounts. Account holders who let others be added to their accounts may earn a few hundred dollars per piggyback client. The middleman collects the difference.

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 whose creditworthiness is an illusion.

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 25 to 30 percent of credit reports have at least one account on which that consumer is an authorized user. Watts said 1 percent of consumers will not be able to be scored at all if the authorized user's information is removed from the calculation of their FICO score.

"While FICO's move has largely remained under consumers' radar screen, its impact will be clearly felt when the change starts taking place in September, particularly among newly divorced women and a fresh crop of college students who will face a new hurdle in establishing credit for the first time," says John Ulzheimer, a former FICO manager and current president of Credit.com educational services.