Piggyback Loans

Following is an interesting article by Liz Pulliam Weston from MSN Money on piggybacking loans. The article can be found at http://articles.moneycentral.msn.com/Banking/YourCreditRating/CanYouPiggybackOnACreditScore.aspx

Can you 'piggyback' on a credit score?

Once again, credit-repair companies are making life harder for the rest of us.

The practice of "piggybacking" was, for years, a legitimate way to help friends and relatives boost their credit scores. You could add the person as an "authorized user" to your credit card, and your good history with that account could be imported into the other person's credit files at the three bureaus.

The credit-score improvements that resulted were typically fairly modest. A single account, no matter how sterling, can only do so much to boost somebody's credit rating.

Recently, though, a handful of credit-repair companies figured out how to supercharge the process -- and make serious money doing so. They solicited folks with good credit who were willing to rent out the authorized user spots on their credit cards for $100 to $125 a month. The companies then sold the slots to people seeking "instant" credit improvement for as much as $900 each.
Although the credit-repair outfits insist the process is safe, both parties in the equation take a risk by divulging their confidential financial information, including Social Security and credit card numbers, to the companies.

An Associated Press story detailed the story of Alipio Estruch, a 37-year-old real-estate agent who paid $1,800 for three slots that helped boost his score from 550 to 715 in about a month, allowing him to secure a mortgage at a favorable rate. Also interviewed was Brian Kinney, 44, a retired Army officer who makes $2,500 a month by renting 19 authorized user slots on two credit cards.
"I know the whole thing sounds kind of odd and not very legitimate, but it is for now," Kinney said. "I don't know how long before someone will decide it's illegal. But I'm not counting on this for the long term."

As well he shouldn't. When Washington Post columnist Kenneth R. Harney first wrote about the practice in April, I predicted in my blog that the credit-repair firms were about to spoil the party for everyone else. And sure enough, it's happened.
The idea that people could game the credit-score system to this extent caused real consternation in the lending industry, which relies heavily on the three-digit numbers to predict the likelihood a borrower will default.

But regulators said the practice wasn't technically illegal and so refused to act. Credit card companies didn't want to change their policies to limit or screen authorized users. The credit bureaus maintained that without law enforcement or creditor help, there wasn't much they could do.

So, even though there's no evidence the practice of renting authorized user slots is widespread, Fair Isaac decided to change the leading FICO credit-scoring formula to ignore all references to authorized user accounts.

The change:

Won't happen overnight. The new FICO formula will be introduced at one bureau in September (Fair Isaac won't say which one) and rolled out at the other two over the following 12 months. Even then, the benefit from being an authorized user won't be entirely extinguished for a while, since not every lender immediately updates to the latest version of FICO formula.

Won't affect joint account holders. If you're jointly responsible for a debt, the related account information will still be reported in both account holders' credit reports. So adding someone as a joint account holder will remain a way to improve his or her credit history, but it involves more risk to both parties. The person being added is jointly responsible for any debt (an authorized user is not), has equal access to the account (an authorized user never has to be given a card or access to the account) and often can't be removed from the account unless it's closed (authorized users can be removed at any time, and the imported information disappears from their credit reports).

Will affect a lot more children, spouses and other innocent bystanders than it will folks gaming the system.

Fair Isaac says most consumers don't have authorized user information in their files and so won't be affected, but that up to 41 million people potentially could see their scores change when the information is no longer taken into account.

Some of those affected may actually benefit from the change if they're authorized users on an account that's being paid late, has high balances or includes other negative marks. But those with positive authorized user histories could see their scores plunge.

Perhaps most at risk are the 2 million or so folks who have only authorized user information in their files -- typically young people or spouses that don't have credit in their own names. Once the information is blocked, these folks won't have enough information in their files to generate any FICO score.

Of course, this isn't the first time credit-repair companies have pooped in the pool. Here are just two examples:

Years ago, a consumer could correct a credit report error simply by submitting a letter from the appropriate creditor admitting the problem. An account that was showing as late or unpaid would be updated to "paid as agreed" status, for example, simply by proffering this proof. Credit-repair companies decided to flood the bureaus with phony letters, which made any proof submitted by consumers seem suspect. That has made getting errors corrected a more complicated and lengthy process for many consumers.

Speaking of flooding the bureaus, credit-repair companies also abused the dispute resolution system by repeatedly challenging negative but correct information -- hoping the bureaus and creditors would just give up and drop the entry. Today, any consumer who challenges an error more than once -- even if a successfully disputed item suddenly reappears -- risks having the subsequent dispute ignored by the bureaus as "frivolous."

Credit-repair companies defend their tactics by saying the whole credit reporting system is flawed, so taking advantage of any loopholes is OK. If every one of their customers were victims of identity theft or foul play by a lender or a bureau, that argument might have some weight.

It's harder to defend the idea that a deadbeat's past irresponsibility with money could be so well masked that a lender thinks it's taking on a good risk. The only ones who benefit from such a fleecing are the deadbeat and the credit-repair firm; the rest of us pay the cost when higher-than-expected defaults result in tighter credit and higher rates.


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