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June 14, 2007

We recently ran across this add on Craigslist:

"BORROW SOMEONE'S CREDIT SCORE WHILE WE FIX YOURS

You heard me... I'll get your score up to buy your house or car now, and
we'll fix your credit for the future. This is the best value in town!!!!"

Borrow someone's credit score? Yup, that's the deal and apparently it is legal.

We found two of those web sites that claim to help borrowers improve FICO scores recommending this method as part of an arsenal of credit repair "tricks" (our word, not theirs.) One of them posted an article from the Credit Repair Institute dated July 17, 2004 which advised readers:

"Borrow credit: By becoming an"authorized user" of someone's credit card, you can in effect borrow someone's credit history. Find a friend or family member that is willing to contact their credit card company and make you an authorized user. Of course, make sure to pick a person with a good credit history on that particular card. If the person who is allowing you to be an authorized user is less than enthusiastic about the arrangement, you can give him the credit card when you receive it. In other words, for this system to improve your credit, you really do not have to do anything except piggy-back on the other person's past and continued good payment history. The most obvious danger here is if the person starts to neglect paying his account."

This technique of building credit, unofficially called "piggy-backing" has been around for years and is often used by parents to help their children beef up their credit scores. But what was a home-grown and usually family centered activity has recently been institutionalized with web sites popping up offering to act as intermediaries in brokering borrowed credit arrangements. In its current incarnation it is generally making lenders and credit reporting agencies crazy but is rapidly and significantly increasing credit scores of those that participate and creating an income stream for credit worthy persons who allow their credit to be piggy-backed.

The motivation behind piggy-backing is that increasing a credit score can mean real money in the pocket of a borrower with less than optimal credit. For example, Fair Isaac Corporation, the company that developed the gold standard FICO scores estimates the following interest rates that are available by score to a homebuyer seeking a $300,000 mortgage:

FICO Score Interest Rate Monthly Payment

FICO Score Interest Rate Monthly Payment
760-850 6.274% $1,852
700-759 6.496% $1,895
660-699 6.78% $1,952
620-659 7.59% $2,116
580-619 8.905% $2,393
500-579 9.899% $2,610

One major facilitator of piggy-backing is Instant Credit Builders, LLC (ICB). It advertises on its web site that it has "developed a system to counter the harmful societal impacts of an emerging market called 'subprime lending.' Mob-like blood suckers under the umbrella of legitimate lending institutions are targeting those who have poor credit scores but fall short of being beyond credit risk acceptance."

Such companies do take some of the risk out of piggy-backing. They set up the renter relationship and handle the financial transaction, receive and destroy the cards issued to the renter and make sure that once the desired effect is achieved the renter's name is removed from the account.

You have to give ICB credit for being right up front with its advertising. No need to register and jump through a lot of hoops to find out exactly what they are about - it is all laid out on its website. Want to rent credit? That will cost $900 for the first "trade line" or authorized user slot, $1,700 for two, up to $3,500 for five aged lines - i.e. those with a lengthy history of good performance. One borrowed account can supposedly increase a score between 40 and 45 points, two between 60 and 90 points, and five between 150 and 205 points.

According to J.W. Elphinstone, writing for the Associated Press, the credit worthy who are willing to lend their credit cards make $100 to $150 per slot depending on the age and credit limit of each card and can parlay his credit cards into regular income. Once the credit card company files a new report to credit bureaus and thus impacts the renters' scores, that renter is removed from the borrowed account releasing that slot to be recycled to other renters. The new information remains on the authorized user's credit report forever.

ICB maintains that some of its credit lenders make up to $5,000 per month if they have high enough scores and multiple open credit lines.

Fair Isaac has long advised persons not to expect instant improvement in its scores from such dutiful activities as paying on time, and closing or paying down accounts, but apparently the impact of piggy-backing on scores is nearly instantaneous. The AP's Elphinstone profiled a borrower who paid $1,800 in December for three credit card spots and in one month his score jumped from 550 to 715.

But lenders are concerned that while they are tightening credit standards in response to problems with subprime lending those improvements are being undone by piggy-backing. The practice is currently legal but perhaps not ethical and the Federal Trade Commission and several states are looking into it.

The phenomenon may not last long. FICO announced on June 12 that piggy-backing will soon come to an end on its watch. In September, when the company issues an updated version of its credit score system, the authorized user category will no longer have an impact on credit scores. It appears that this change will be retroactive, thus rolling back the scores of "authorized users." This will, of course, also affect the scores of the kid who might benefit from a brief period as an authorized user of his father's card but FICO feels that no more than 25 percent of credit scores will be impacted by the change. And maybe putting Junior on dad's card is no more a legitimate use of the credit scoring system than if dad were renting out that slot for $150.