Credit Score Formula Changing to Fight "Credit Renting"

Filed in archive Credit on June 12, 2007

Fair Isaac, the company whose FICO credit scores are used by the majority of lenders to decide whether you deserve a loan, credit card, etc. and at what interest rate, is changing its scoring formula starting in September. The main reason? Credit renting---people buying their way to "authorized user" status on other people's credit cards in order to increase their scores. Starting in September, FICO scores will disregard such authorized users.

The concept of allowing a credit card holder to add an authorized user to an account was intended to give cardholders the ability to put their kids or spouses on their accounts (and of course make more money for the credit card companies). In the process, those authorized users could expect a bump in their credit scores---even though they were not liable for making payments, they still got a bit of magic credit score pixie dust when the bills got paid.

Not surprisingly, clever entrepreneurs saw a loophole. Sites like Instant Credit Builders now pay those with good credit to rent out their "Seasoned Trade Lines" (long-time credit accounts in good standing) to those with bad credit in order to help the bad credit customers build their credit scores and qualify for a loan. In other words, a person with good credit gets paid to put a bad credit customer on his/her credit card as an authorized user. The bad credit customer pays for the privilege in order to raise his/her score. The Instant Credit builders of the world act as middlemen, taking a cut of the transaction.

While I personally can not in a million years imagine putting a Stranger with bad credit on my credit card as an authorized user, there are obviously people with good credit who have little common sense. According to the site, you can get on a good credit customer's card for $900, meaning I'd be getting less than that for the opportunity to have my good credit trashed. Yikes.

Nevertheless, this will soon all be for naught, as Fair Isaac isn't having it anymore. Come September you'll have to increase your credit score the old-fashioned way---by earning it.