Consumer Alert: FICO Scores Dropping Authorized User Accounts

Update: In July 2008, FICO announced that they reversed their decision and would continue to count authorized user accounts from their new FICO 08 scoring formula. Authorized user accounts are counted in current FICO credit scores, although the company has added additional features to block the impact of piggybacking services. Read more about how to establish healthy credit for the first time or rebuild after credit damage.

A major change to the FICO credit score formula was announced by Fair Isaac Corporation in September 2007. FICO scores will no longer factor authorized user accounts into their credit scoring formulas.

Consumers who are listed as authorized users on credit card accounts will likely see a significant change in their credit scores when this modification takes place later this summer.

For most consumers, this change will have a negative impact on their credit scores. Only consumers who are listed as an authorized user on negative accounts or accounts that have balances that are close to the credit limit will possibly see an increase in their credit scores.

Adding a family member or friend as an authorized user on an existing credit card account has long been used as a way to establish credit. Many parents added their children as authorized users in order to help them build their credit history.

However, credit repair organizations have also started using this system as a way to fraudulently sell authorized user account access to consumers with credit problems. This credit repair loophole was part of the motivation for the FICO score change.

Q&A

What does this mean for consumers?
Consumers who are benefiting from authorized user accounts on their credit reports will see their credit score decrease when this change takes effect. They will essentially be “losing credit” for these accounts. Consumers with negative authorized user accounts (with late payments or high balances) could possibly see an increase in their score.

What is an authorized user account?
Credit card issuers will allow customers to add other people to the account as an “authorized user” without running a credit check. The authorized user can then use the credit card and will have the account record appear on their credit report.  The authorized user has no liability for the payments.

How many people will be impacted?
Fair Isaac has reported that 30% of the population has an authorized user account listed on their credit reports.  That means that between 60 and 75 million consumers will be impacted by this change.

Why did FICO make this change?
Credit repair organizations were abusing the authorized user system. Some companies were illegally selling access to authorized user accounts as a way to help people with credit problems improve their scores. These services would retail for thousands of dollars in some cases.

How will people establish their credit without authorized user accounts?
While being added as an authorized user used to be a great way to build your credit history, it wasn’t the only way. Consumers with no credit can still apply for their own retail credit card, gas credit card, secured credit card or subprime credit card as a way to build their credit. This method of establishing credit is a bit more difficult and expensive than being added as an authorized user.

What does this mean for the credit card industry?
Credit card issuers will have to adapt to this change slightly. Consumers may be less motivated to have authorized users on accounts. There will probably be an increase in first time borrowers looking for subprime or secured credit cards as a way to build their credit history.

More Information

A few days ago Fair Isaac Corporation, creators of the FICO credit scoring system, announced that they would change how their models treat credit card accounts that belong to ‘authorized user’ cardholders.  In the past few weeks there has been a media frenzy covering a loophole in the FICO score referred to as “piggybacking” whereby a consumer can improve their credit scores by being added as an authorized user on someone else’s credit card account if that account is in good standing with a low balance relative to the credit limit.

There are several companies who are violating the Credit Repair Organizations Act by charging consumers hundreds or thousands of dollars for acting as a “match maker “ and connecting consumers who want to buy onto a good credit card account with consumers who don’t mind selling access to their hard earned good credit card account.  This is also being looked into as potential application fraud since the intent of buying onto a stranger’s credit card account has no other application other than to improve ones FICO scores, which is the primary marketing theme of the companies brokering the accounts.

According to Tom Quinn, Vice President of Scoring for Fair Isaac Corporation, the practice has been on their radar for some time.  “We are aware of the practice (of consumers trying to game the system) and have been since last year.”  Later this year Fair Isaac will start the process of closing the loophole when they install a newly redeveloped version of their FICO scoring software at one of the three national credit reporting agencies.  This newer version will “completely bypass an account that is listed as an authorized user account”, according to Quinn.

In early 2008 the other two credit reporting agencies will install a newly redeveloped version of their FICO scoring software and the loophole will have been completely closed once lenders migrate to the newer versions.  “We decided to make the change a part of our regular FICO score redevelopment process.  This makes it easier for lenders to study the impact of the new score just once rather than making the change off-cycle which would have made lenders study the impact of a different score twice” Quinn said.  

If an account is completely bypassed it will have no impact to the consumer’s FICO score whatsoever.  That means it can’t help the score, it can’t hurt the score and it also cannot help the consumer’s credit file qualify for a score.  It’s like the account doesn’t even exist. 

For a more detailed Q&A of Ulzheimer’s conversation with Tom Quinn please continue below

Interview with Fair Isaac Corporation

Ulzheimer:  Was Fair Isaac aware of these companies that would sell access to credit card accounts for the purposes of trying to fool the FICO score into giving the consumer a better score?

Quinn:  Yes, we were aware of the practice and have been aware of it since last year.  We’ve conferred with lenders about the practice as well.

Ulzheimer:  When will the first of the three credit bureaus install the newer version of the FICO score that has the ‘authorized user’ loophole closed?

Quinn:  Later this year

Ulzheimer:  When will the other two credit bureaus install the newer version that has the loophole closed?

Quinn:  Early 2008

Ulzheimer:  Will Fair Isaac retrofit the existing versions of its FICO scores at the three credit bureaus?

Quinn:  No, the change will be made to future versions only

Ulzheimer:  Will the change be made to the newer versions of the FICO Industry Option scores as well?

Quinn:  Yes

Ulzheimer:  What exactly will this change in the treatment of the authorized user account be?  Will it only ignore the credit limit and the balance or will it bypass the entire account?

Quinn:  The entire account will be bypassed

Ulzheimer:  Even for minimum scoring criteria?

Quinn:  Yes

Ulzheimer:  What percentage of consumers should expect to be impacted by this change to the FICO score?

Quinn:  Our analysis during development showed that 30% of the population has an account on their report that lists them as an authorized user

Ulzheimer:  Why didn’t Fair Isaac make the change to the current models that are in production?

Quinn:  We decided to make the change a part of a regularly scheduled FICO score redevelopment to make it easy for lenders to adopt it.