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FICO quirk: Authorized user accounts

Authorized user; seasoned tradelines; piggyback; riding on the coattails of somebody else's credit history

| By Greg Fisher

"We don't want to have consumers trying to alter their behavior in short term ways that will --regularly has nothing to do with their long term credit risk." - Fair Isaac, 1999

Revisionist credit history: Piggybacking

When the Florida swamp land deals dried up, the flip-flop shorn sales professionals had to find a new way to fund their larger-than lifestyles. So, the "Authorized User" industry— one based entirely on a quirk in the FICO formula— was born. Those fearless entrepreneurs, the real backbone of our nation, set out to innovate via synergy— to make something new using only what was right under our noses. And who'd-a thunk what they came up with?

They sold reputations to increase credit scores.

That's right, they found a way to transplant character from one human being to another. They took and gave rich guys' seasoned tradelines (tradeline is creditspeak for one account's history on a credit report) to the credit-poor guys (for a fee, of course). The amazing tool for redistribution of wealth was all the rage on craigslist.

How did those slicky-boy Sunshine State salesmen figure that out? They found secret, inside knowledge— on the internet!

Scandalous! Shocking! Just shocking! How dare they act bourgeois?!

Experian touts VantageScore panacea

Meanwhile, in the midst of a big brouhaha over anti-competitive behavior, a big-three credit bureau took up the issue with federal banking regulators.

Experian submitted comments dated 5/7/07 to the Federal Reserve Board regarding subprime mortgage lending practices saying, "In light of this loophole and the potential threat it poses to lenders, a decision was made during the development of VantageScore to exclude authorized user tradelines, both with good and bad payment histories reported on them, from the final score algorithm."

But while tattling to the Feds, conflicted Experian continues to hawk its PLUS score all over the place— and it allows authorized user accounts.

Who's afraid of the big, bad credit bureaus?

Ouch. Now that hit Fair Isaac right in the old distribution. And so, if they couldn't position themselves as the original credit score, they could still raise a ruckus about it and drown out the cheap shot. So, four weeks later, they made the big announcement: They're dropping counting authorized user accounts. No more piggybacking. No more loophole.

Comedy ensued. And Fair Isaac got all the love. The resulting media clamor proved one huge point: The FICO score is still the big dog on the porch, and when it growls, people pay attention.

Fair Isaac brushed off VantageScore as a ploy by the big-three consumer reporting agencies to keep the FICO price in check while predicting a 13% increase in earnings per share.

Muffy and Biff will be fine. Mom and Daddy will just make a down payment to make up for the lost score. But for poor families— well, sometimes doing the right thing is ruthless. Developed in the 1980s, the entire FICO credit score should have been scrapped a long time ago; its creator even tried to replace it. Instead, they're keeping the old jalopy running with chewing gum and bailing wire. Accepting the perceived alternative, VantageScore— a joint venture between three companies who can't even get their act together, individually, on the fundamentals— is just stepping into the lion's den. Corporate America's laziness and herd mentality just won't let the FICO die.

"To better track and model prepayment and default rates of AMA, the [Federal Housing] Finance Board proposes adding new loan-level data elements: 'Type of Credit Score;' 'Adjustment Frequency;' 'Negative Amortization;' 'Current Unpaid Principal Balance;' 'Current Coupon;' and 'Loan Amount' (for multi-family AMA); and redefining 'Borrower Credit Score' and 'Co-Borrower Credit Score' to include, in addition to the Fair, Isaacs, Co. (FICO) score, the NextGen FICO credit score." - The Federal Housing Finance Board

TransUnion saves the day. Sells flawed system, then band-aid for the flaw. "TransUnion Delivers Solution to Market that Mitigates Authorized User Abuse" "Taking a look at mortgage approvals during a three month period (July-September 2006), TransUnion recognized that approximately 50 percent of this loan pool was potentially impacted by this practice."

"Fair Isaac Moves to Protect Lenders from Fraudulent Manipulation of Authorized User Credit Card Accounts" - Press release, Fair Isaac, 6/5/07

"Putting a Stop To a Credit Ruse" - The Washington Post, 6/16/07

WASPy Whining: "Can you 'piggyback' on a credit score? Authorized users once were able to piggyback on a parent's or spouse's great credit. But now that the credit-repair companies abuse the privilege, the rest of us will lose it, too." - MSN Money, 6/18/07

2007 authorized user news via RSS (see category: "Authorized user")

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