Monday, July 23, 2007

Nasty change to FICO scoring model coming

I'm late on this news, which I just stumbled across: FICO 08, the next update to the FICO algorithm used to compute credit scores, will drop "authorized user" accounts from its scoring model. This is going to screw a number of people, including me and David.

I've written before about how FICO scores are calculated, and how one of the faster ways to build a credit history or repair a damaged one is to become an authorized user on a credit card owned by someone else with a strong credit history. Authorized user accounts are distinct from joint accounts because the authorized user has no legal responsibility for the account -- they're given a card and can use it, and the complete credit history for the card (for all users) is reported to credit agencies and goes on the authorized user's credit record, but only the primary cardholder is legally responsible for paying the balance. If you don't want or can't get your own credit card, but do want to establish a credit history, piggybacking on another person's account as an authorized user has been a nice quasi-loophole.

In my first FICO post, I noted, "Those 'fast credit repair' services that splash ads all over the Web are scammy. There's legally nothing any third party can do to change your score." Oops. Seems some agencies figured out that they could increase clients scores by listing them as authorized users on "rented" credit card accounts in good standing. An AP article on the practice cites as one such agency.

One this practice started drawing press, FICO's creator, Fair Isaac, clamped down. It announced in June that FICO 08, which begins rolling out to credit reporting agencies (Experian, Equifax and TransUnion) in September, won't factor in authorized user accounts.

This could seriously torpedo David's credit score. David, sensibly, doesn't want a credit card -- he'd rather only spend money he knows he has. But a few years ago, I realised this had left him with no credit record whatsoever, and therefore, a low score. (Since credit-granting agencies want to know what kind of a track record you have paying back debts, you have to actually use credit to generate a record and receive a high score. Using no credit at all can leave you with as low a credit score as someone who has a trail of late payments and other credit problems.) So I added him as an authorized user on two of my cards and presto, score.

I suppose I'll tackle this by calling Amex and seeing if David can be made a full joint user on my Amex, which had pretty much already turned into a joint account anyway. Still, I imagine this change could seriously ding the people "authorized user" status was intended for -- young adults tagging along on a parent's card and spouses who don't maintain their own credit cards.