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Credit Scoring Loophole to be corrected by Fair Isaac

Posted on August 23, 2007 by Ray Williams (NMLS #216267).

“Authorized Users” benefit to be eliminated in credit scoring

For quite some time many people who have needed to boost their credit scores have been added to a family member’s credit card account. They would show up on the account as an authorized user. What this would do is “rent” credit. How this was done, was that if you were added as an authorized user you would automatically get “credit” for the other person’s history, balance, and limit as if it were your own. Once someone was added as an authorized user it would populate on their credit report with the bureaus and Fair Isaacwould recognize it as an account and scoring would be affected accordingly. Usually this would immediately increase someone’s credit score and help them qualify for a home loan, even if their own personal credit didn’t satisfy underwriting guidelines for home loans. Many lenders would disregard that authorized user account as an active personal account, but it did help people’s credit scores once it was done.

This would help if someone needed to build a credit score to help qualify for a home loan. Fair Isaac wouldn’t disseminate between an authorized user account and an account the person was listed as a borrower on.

However, with so much pressure on Fair Isaac to correct the credit scoring model there has been a fix to the “authorized user” benefit. What will happen is the scoring model will look to see who is responsible for the account. If shows as an authorized user, then the person’s credit score won’t reflect as if they are the borrower signed on the account. The reason for the fix is to make credit scoring more accurate and to reflect the actual accounts one is responsible for.

The reason authorized user accounts aren’t factual for scoring is that if you are an authorized user you aren’t legally responsible for the financial liability created by that debt. If you were an authorized user on an account a creditor can’t come to you for collection of the borrowed monies. That being the case it makes sense that someone who can’t be held liable for a credit card, shouldn’t benefit from the scoring impact which results by paying that debt back.

If you have authorized user accounts showing on your credit report make sure you also have a couple of your own accounts started before the change takes affect in the next months. Otherwise, you will lose the benefit from the credit score “bump” from the authorized user account and have nothing to fall back on for your own credit score.

If you are thinking of buying soon and are working to make sure your credit and finances are in order beforehand shoot me an email or call 303-779-0591 to discuss what things should be done to be ready.

Have a great day!

Ray

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