Monday, June 11, 2007

Credit scoring change overdue

THE SAVAGE TRUTH | But 'authorized user' change may hurt some women

In March I wrote about the dangers of "lending" your good credit to desperate strangers seeking to borrow money at interest rates lower than their own credit rating would justify.

Web sites had sprung up to act as "matchmakers" between people who needed improved credit, and people who have excellent credit and were tempted to earn some extra money every month by allowing these deadbeat strangers to become "authorized users" on their credit card accounts. The sites collected fees from both parties.

(Authorized users have no liability for payments, and do not have to undergo a credit check before being added to an existing account.)

Violates credit-repair act

It was a practice that should have been stopped by the government. The services clearly violate the Federal Credit Repair Organizations Act, because of how they accept payment for promises to boost the deadbeats' credit, according to John Ulzheimer, of

I'm surprised no state or federal prosecutor sued these companies for facilitating bank or insurance fraud. By fraudulently enhancing a credit score, all three participants - the borrower, middleman, and "lender" of credit -- were participating in a deception.

Now, Fair Isaac, the company that created FICO, the most popular credit scoring system used by lenders nationwide, has announced that its new scoring model will no longer factor the scores of "authorized users" into its FICO accounts.

It's a move that should put an end to the enticement of letting a stranger use your credit-worthiness when applying for insurance or a loan. But it may also affect many unwary people, causing their credit scores to drop sharply.

This change could have a huge impact on women. Many women who use their spouse's credit card are unaware that they are not joint holders of that card.

Instead, they have gone for years as an "authorized user" on the spouse's card. Most card issuers do report payments on a user's credit report. But now, that payment history will no longer count as part of the credit score!

In the future, if that woman wants to purchase insurance or open a new account, she may find she has a very low score -- simply because those credit cards are no longer counted in her score.

Many parents added teens to their credit card accounts as authorized users to help them build a credit record. Now these accounts won't be included to help build the teens' good credit score.

I've always suggested the best way to help a young adult build a credit history was to open a "secured" card account, with a credit limit based on a deposit in a savings account at the credit granting bank.

Then the young cardholder can use the card to make purchases or cash withdrawals, and build up his or her own record of prompt and complete monthly repayments.

All of that payment history will be reported to the credit bureaus under the individual's name. (To search for a "secured card" go to

A change for the better for all
While this change in FICO scoring may prove inconvenient for many of those who are well-meaning and legal "authorized users" of credit cards, it will close down a fraudulent process that affects all consumers by raising the cost of credit.

After all, if an individual can't qualify for credit on his or her own, but secures it fraudulently, there is a great likelihood of default -- whether on a mortgage or some other purchase.

And when lenders lose, we all wind up paying. That's the Savage Truth.

Terry Savage is a registered investment adviser.

For more info and to order your credit report with FREE credit score please visit

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