A Change in the FICO Scoring System Seals the Gap for Authorized User Accounts

I. Introduction:

     In June 2007, the Fair Isaac Corporation announced its plans to
modify the FICO scoring system to better ensure the “continued
reliability and predictive power of FICO scores.” [1] These changes
were set in motion on September 1, 2007, and are declared to be the
most significant alterations made to the scoring system in the last ten
years. [2] Analysts are unsure how the new scoring model, known as FICO
08, will affect the overall credit system, but they have “no doubt that
[FICO 08] will have a major impact on credit scores across the
country.” [3] One of the major changes that will affect over 50 million
consumers [4] is that FICO scores will no longer factor authorized user
accounts into their credit scoring formulas. [5]

II. Who will be affected?

     The practice of becoming an authorized user on another person’s
credit account has long been used by college students and poor-credit
consumers alike to establish credit as well as to rebuild credit. This
was a common strategy by parents to add their “children as authorized
users in order to help them build their credit history.” [6] Similarly,
consumers with poor credit scores would seek a creditworthy borrower's
account to improve their credit rating. This controversial, but legal,
credit-building strategy, often refered to as “piggybacking,” allowed
consumers with little or poor credit scores to add “themselves as an
authorized user on the credit card account of someone with a good
credit score and receive a credit score boost.” [7]

     Another specific group of consumers who will greatly be
affected by these changes are female spouses. In a study conducted by
Credit.com, 61% of the individuals who identified themselves as
authorized users were woman. [8] This disproportiante percentage is due
to the trend that “most of the time it’s the woman who changes how she
uses credit and becomes an authorized user on her husband’s account.”
[9] Accordingly, newly divorced woman may particularly be susceptible
to this modification. [10]

III. What has motived this change?

     Lenders have long known about the “piggybacking” loophole and
have complained that this gap undermines the system as well as distorts
the credit score system. [11] As this process grew in popularity,
internet credit repair companies have joined this campaign of matching
up poor credit users to willing creditworthy consumers for a fee;
essentially defrauding the lenders. [12] Fair Isaac claims that this
change is intended to protect lenders and FICO scores from the abuse of
these “new kind of credit repair services” which “sell consumer credit
card histories to credit applicants in order to purposefully
misrepresent the applicants' own credit history to lenders and other
businesses.” [13] Dr. Mark Greene, CEO of Fair Isaac, stated that Fair
Isaac “will continue working with lenders, regulators and others in the
credit reporting industry to end deceptive practices that fraudulently
misrepresent consumer credit histories for profit." [14]

IV. How will this affect an authorized user?

     Experian, one of the three leading credit reporting agencies,
has taken the reigns on implementing FICO 08. [15] It is expected that
Equifax and Transunion are soon to follow and will put FICO 08 into
practice sometime in early 2008. [16] Consequently, young adults, poor
credit holders, and spouses will no longer be able to receive the
benefit of being an authorized user on another person’s credit account.
The millions of consumers who are currently benefiting from an
authorized user’s account will soon see a decrease in their credit
score. [17] John Ulzhheimer, current president for Credit.com, states
that “[a]uthorized users with no credit history of their own will see
their credit score disappear. When these consumers apply for credit
they'll probably be rejected.” [18]

V. Conclusion: What is an authorized user to do?

     While being an authorized user was one way to build credit, it
was not the only way. [19] One quick-fix remedy that is available to an
authorized user is to become a joint account holder. [20] “This means
that you will have equal liability for the payments and for the debt,”
[21] and therefore your credit score will not fall victim to this
change. Ulzheimer claims that this is particularly important step for
any spouse to take to safeguard one’s credit record. [22] Other options
consist of applying for new credit. Whether it is a new credit card, a
gas credit card, or a secured credit card, the goal is to establish a
credit record. [23]

     The die has been cast and the Fair Isaac Corporation will completely implement FICO 08 within the next year.  Although
the ramifications of FICO 08 will not occur suddenly, it is a good idea
for authorized users to start building their own credit as soon as
possible.  While FICO 08 may seal the gap for
authorized users to obtain a credit history quickly and easily, there
are other routes to establish one’s credit.  Whether it is through joint accounts or applying for new credit cards, there are a lot of options out there.


[1] Fairisaac.com, Fair Isaac Moves to Protect Lenders from Fraudulent Manipulation of Authorized User Credit Card Accounts, http://www.fairisaac.com/NR/exeres/FAC104CE-DF7F-4610-8A36-85F39C4ED9AB,frameless.htm (last visited Sept. 24, 2007) (hereinafter Fair Isaac Moves to Protect Lenders).

[2] John Ulzheimer, More News About the Fico Credit Score Change, http://www.credit.com/credit_information/credit_report/More-News-About-the-FICO-Score-Change.jsp (last visited Sept. 24, 2007) (hereinafter Ulzheimer, More News About the Fico Credit Score Change).

[3] Efinancedirectory.com, Change in FICO Scoring System Could Affect Mortgage Loan Availability, http://efinancedirectory.com/articles/Change_in_FICO_Scoring_System_Could_Affect_Mortgage_Loan_Availability.html (last visited Sept. 24, 2007) (hereinafter Change in FICO Scoring).

[4] John Ulzheimer and Emily Davidson, FICO Scores Dropping Authorized User Accounts, http://www.credit.com/credit_information/credit_report/Consumer-Alert-FICO-Formula-Changes.jsp (last visited Sept. 24, 2007) (hereinafter Ulzheimer, FICO Scores Dropping Authorized User Accounts).

[5] Sandra Block, Shortcut to good credit will end, Freep.com, Aug. 5, 2007, available at http://www.freep.com/apps/pbcs.dll/article?AID=/20070805/BUSINESS07/708050572/1002/BUSINESS.

[6] Ulzheimer & Davidson, FICO Scores Dropping Authorized User Accounts, supra note 4.

[7] Consumerist.com, Fico Removing “Authorized Users” From Calculations; Credit Piggybackers Scores Dropping, http://consumerist.com/consumer/leaks/fico-removing-authorized-users-from-calculations-credit-piggybackers-scores-dropping-288808.php
(last visited Sept. 24, 2007).

[8] Ulzheimer, More News About the Fico Credit Score Change, supra note 2.

[10] Change in FICO Scoring, supra note 3.

[11] Brigitte Yuille, FICO Credit Score Drops Authorized Users, Bankrate.com, (last visited Sept. 24, 2007).

[12] Change in FICO Scoring, supra note 3.

[13] Fair Isaac Moves to Protect Lenders, supra note 1.

[14] Id.

[15] Id.

[16] Ulzheimer, More News About the Fico Credit Score Change, supra note 2.

[17] Block, supra note 5.

[18] Id.

[19] Change in FICO Scoring, supra note 3.

[20] Ulzheimer, More News About the Fico Credit Score Change, supra note 2.

[21] Id.

[22] Block, supra note 5.

[23] Id.