Wednesday, June 06, 2007

For Rent: Your Credit Score

For Rent: Your Credit Score
Loophole in FICO Enrages Lenders

By Martin H. BosworthConsumerAffairs.Com

June 5, 2007

Plastic Prison • Credit Tips And TricksGet Control of What You OweNo Easy Way Out Of Credit Card DebtPenalty Fees, Interest Rate Hikes, and Misleading Contracts Await Credit Card Shoppers"Convenience Checks" Carry a Heavy Price TagNew Forms of Credit ScoringUnderstanding CreditCredit Bureaus: Who You're Dealing WithReading Your Credit ReportCredit Scoring: The Fickleness of FICOCredit Knowledge: A Long, Hard, Struggle---News• For Rent: Your Credit ScoreFed Proposes Tighter Controls On Credit Card RatesSenate Bill Would Curb Abusive Credit Card PracticesSenate Panel Slams Abusive Credit Card PracticesCongress Targets Credit Card Companies For ReformReport Finds High Debit Card Overdraft FeesBank, ATM Fees Continue To RiseCredit Card Fees Rise, Disclosure Statements InadequateFree Credit Reports Mark First AnniversaryCredit Card Debt Sinking Many Older ConsumersExperian Launches New Credit Score; Critics UnimpressedCredit Cards Target StudentsCredit Card Companies Fear "Perfect Storm"Credit Bureaus Introduce New Scoring SystemMore Banks Using Universal Default to Hike Interest Rates

The all-important three-digit number known as your credit score has become the central pivot on which the financial industry moves.

Borrowers are repeatedly told to demonstrate good financial behavior not just for its own sake, but to ensure that their credit score stays high enough to receive approval from lenders. And a score that doesn't meet with lenders' approval can keep otherwise responsible borrowers from getting a home or car loan for years.

So it should come as no surprise that companies like (ICB) and have devised a way to game the system -- in this case, by paying people with high credit scores to let low scorers "piggyback" on their ratings and receive boosts to their own scores as a result.

The new trick takes advantage of a loophole in the credit system. People who have little or no credit histories, such as college students, can be added as an "authorized user" to credit cards that are ultimately paid for by Mom and Dad.

In this case, the "authorized user" with good credit is paid several hundred dollars to "rent" their credit score out to someone else, with the agency taking their cut from the potential piggybacker.

Lenders Object

Although the Federal Trade Commission has been taking a wait-and-see approach to the issue, the financial and mortgage industries are already on the warpath.

The National Association of Mortgage Brokers (NAMB) is planning to release a statement opposing the practice. Mortgage lenders say the practice undermines the trust lenders place in the FICO score, which is by far the most widely-used scoring system for new loan approvals.
"We have become so dependent on FICO scoring that we rely on it almost to the point that FICO is the decisionmaking process," Bremer Mortgage president Jim Miley told the Minneapolis Star-Tribune. "If we can't get assurances that FICO scores are accurate, then we will definitely go back to manual underwriting of loans, a time-consuming and expensive process."

Unforeseen Consequences

Fair Isaac, creators of the FICO score, has said that it will close the "authorized user" loophole in its credit scoring model to protect against "piggybacking." John Ulzheimer of says that the move is going to "screw consumers royally."

"A lot of people are going to get penalized for something a few bad apples did," Ulzheimer said in an interview with ConsumerAffairs.Com. "The value of any authorized user on a credit card is now totally lost."

Ulzheimer said that anyone who has built a credit history as an additional user on a card, ranging from college students to married couples and divorcees, will have to "rush out" and open up new credit accounts to rebuild or maintain their scores and credit histories.

"It won't be as big a rush as people filing bankruptcy before the new laws took effect,"
Ulzheimer said, "But you'll see it happen."

Ulzheimer, who formerly worked at both Fair Isaac and Equifax, said companies like ICB are liable for enforcement under the Credit Repair Organizations Act (CROA), which mandates the rules that so-called "credit repair organizations" work under. "The minute they take money in advance, they're liable under CROA," he said. "This is a case of merchants ripping off businesses, and some consumers ripping off lenders."

Bad Data

FICO became dominant largely because it streamlined the formerly cumbersome and detailed process of lending down to a simple number.

Whereas local credit bureaus and mortgage lenders would previously look at a person's entire financial history and make calls based on individual judgment, the modern system relies almost totally on the proprietary algorithm developed by Fair Isaac, and based on information in credit reports that is very often inaccurate.

The ease with which credit could be approved led to an explosion of availability of lending to people who would not ordinarily have qualified, but the mania to approve credit and sell reports and scores to lenders also led to constant errors and mistakes in reports that are very difficult to correct.

Now the housing market is in the doldrums, thanks to subprime loans going into default and foreclosure accross the country. Even the Federal Reserve is reconsidering the easy access to credit that consumers have come to take for granted.

And the closing of the "authorized user" loophole won't just make building credit tougher for consumers -- it's exposed a vulnerability in the FICO score that has competitors like the credit bureau-backed VantageScore ready to pounce.

John Ulzheimer had previously criticized the new score, which is sold right from the three bureaus, as "an effort to confuse consumers and unsophisticated lenders."

Now, he said, "I wouldn't be surprised if there was an all-hands meeting at VantageScore Solutions to discuss what to do" about the loophole in the FICO score. "They're licking their chops."

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Monday, June 04, 2007

Highs & lows for consumer in search of his credit score

Posted Monday, June 4th 2007, 4:00 AM
When Mel Larson requested his free annual credit report from a major credit reporting agency, he also ordered his credit score. "There was a $5 charge, but I felt it was a good idea since the number is important," he explained.
But he wasn't happy with what he got. "I received something called a VantageScore, not the FICO score I expected," he said. "My score was 898, well over the top FICO score.
Can a VantageScore be translated to a FICO score?"
Not exactly. Credit scores are the three-digit numbers that lenders use to assess the credit risk of a potential borrower.
Fair Isaac's Classic FICO score is the most often used credit score in consumer lending and mortgage lending. FICO scores range from 300 to 850.
Although FICO scores remain dominant, several alternatives have developed within the past few years.
In March last year, the nation's three leading consumer credit reporting companies - Equifax, Experian and TransUnion - jointly launched their own proprietary credit scoring system, VantageScore.
When you order your credit report fromExperian or TransUnion, you receive a VantageScore. Equifax, however, still provides FICO scores.
If you want to get a FICO score based on your Experian or TransUnion credit report, you have the option ofordering it from Fair Isaac (
Otherwise, you can only roughly compare your FICO score and VantageScore.
VantageScores range from 501 to 990, and approximate the letter-grade system used in most schools. That means a score of 901 to 990 is an A, while a score of 801 to 900 is a B, 701 to 800 is a C, 601 to 700 is a D and 501 to 600 is an F.
If you have a FICO score of more than 730, then you're in the solid B range. If it's 770 or more, you get an A. FICO scores of 680 to 729 are in the C range, while scores of 620 to 679 are Ds. Anything lower than 620 is an F.
Asa Aarons is a consumer reporter whoappears at 5:30 p.m. weekdays on WNBC-TV, Channel 4. His special Daily News column appears Mondays, Tuesdays, Thursdays and Fridays. Send your questions to Ask Asa, P.O. Box 3310, NewYork, N.Y. 10116 or e-mail him ( Questions can be answered only through this column.End Content Columns -->