Credit Scam Loophole Finally Closed

Credit-borrowing scammers will be hurt by Fair Isaac's move. So will a lot of innocent bystanders.
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In March, I wrote about

the dangers of "lending" your good credit

to strangers desperately seeking to improve their credit scores. I called it "the first great scam of the new millennium" because it was so 21st-century.

Web sites had sprung up to act as "matchmakers" between people who wanted to improve their 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.

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

By acting as the middleman, the Web sites collected fees from both sides -- a simple and very lucrative process. The dangers seemed obvious. Though the Web sites promised they would never actually share card numbers and credit information with the borrower, some of that info would turn up on their credit report when they applied for a mortgage -- enhancing their credit score. The Web sites assumed no liability for misuse of the information.

It was a practice that

should

have been stopped by the government. The offerings clearly violated the Federal Credit Repair Organizations Act because of how they accept payment for promises to improve your credit score, according to John Ulzheimer, of

Credit.com

.

It's also surprising that no state attorney's office or U.S. attorney's office filed suit against these companies for facilitating bank or insurance fraud. After all, by fraudulently enhancing a credit score, all three participants -- the borrower, middleman and "lender" of credit -- were participating in a deception.

FICO Steps In

Now,

Fair Isaac

(FIC)

, the company that created the most popular FICO credit scoring system used by lenders nationwide, has announced that its new scoring model will no longer factor in the scores of the "authorized user" 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.

According to Ulzheimer, there are between 60 million and 75 million consumers who have an "authorized user" account on their credit reports. Many are spouses, some are children or family members.

Credit payment history of those "authorized users" may -- or may not -- be reported to the credit bureaus under the user's name. That decision is up to the credit grantor. The information may still be reported -- but it will no longer be counted toward the user's credit score.

Impact on Women

This change could have a huge impact on women, particularly those who are married. 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.

Now that payment history and "balance to credit limit" ratio will no longer count as part of those women's credit scores! In the future, if a 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. That means that even though nothing has changed on her credit report, her score could still go down!

Recommendation

: Get your credit report from

AnnualCreditReport.com

, which is authorized to provide you with one completely free credit report per year from each of the three major credit bureaus. Make sure that you are a joint holder, not an "authorized user" on any credit card account.

Getting Credit for Teens

Parents who want to help children establish credit will also be affected. Many parents add teens to their credit-card accounts as authorized users in order to help them build a credit record. Now these accounts won't be included to help build their children's good credit score.

I've always thought 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. That way, 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

Bankrate.com

.)

Better FICO, 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 hurts 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 an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,

The Savage Number: How Much Money Do You Need?

in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald�s and Pennzoil.