New FICO Model Changes Approaches to Consumer Credit: The Fair Isaac Corporation Is Making Changes to Its FICO Credit Scoring Model That Will Affect Not Only Consumers' Credit Scores, but Also How People Go about Establishing Credit

By Slade, Sibyl | Partners in Community and Economic Development, Fall 2008 | Go to article overview

New FICO Model Changes Approaches to Consumer Credit: The Fair Isaac Corporation Is Making Changes to Its FICO Credit Scoring Model That Will Affect Not Only Consumers' Credit Scores, but Also How People Go about Establishing Credit


Slade, Sibyl, Partners in Community and Economic Development


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The shift comes in response to recent jumps in credit card and auto loan defaults. In the fourth quarter of 2007 delinquencies rose to their highest level since 1992 according to a statistics from the American Bankers Association.

FICO 08, as the new model is called, will no longer allow authorized users of existing credit cards to build credit based on the original cardholder's track record. It will also recalibrate the impact of payment delinquencies on credit scores. The goal of the revision is to offer better predictions of the likelihood a customer will fail to repay consumer loans. Fair Isaac estimates that companies switch ing to the new system will cut default rates by 5 to 15 percent.

These modifications represent the first overhaul to FICO standards in 10 years. Established in 1956, the Fair Isaac Corporation is an industry leader in credit score modeling, decision management platforms, fraud detection, and credit scoring services. About 90 percent of all large lenders rely on FICO scoring models in addition to other scoring models when making decisions about credit applications.

No more credit boost for authorized users

Recent changes to the FICO scoring model will no longer recognize authorized user accounts in determining an individual's credit score. Previously if a parent, say, wanted to help a college student establish a good credit rating, the student could be added to the parent's account as an authorized user and benefit from the parent's good credit. The new model will prohibit an individual from receiving a boost in their credit score by being an authorized user on an account that maintains a good payment history.

This shift came partly in response to a credit-repair strategy known as "piggy backing," which allows individuals with damaged credit to sign onto accounts of those with excellent credit. For a price, a consumer with a checkered credit history could use this strategy to improve his or her credit rating.

Loss of the authorized user strategy will make it harder for family members to help build a credit history for a child, spouse or others in the household who would benefit from this approach. The lack of a solid credit score typically influences the cost of credit, vehicle insurance rates, utility deposits and employer hiring decisions.

While the affected consumers are now faced with building their credit history from the ground up, having a joint account to build a credit file remains an option. However, joint accounts come with additional risk because both consumers are equally liable for the debt. Also, the only way to remove a joint holder from the account is to close it.

"Piggy Backing" makes rating credit harder

Authorized users on credit accounts traditionally have been family members assisting other family members to build or improve a credit file through leverage of their good payment history. However, in recent years, credit repair companies have turned the authorized user system into a loophole for those with poor credit ratings by selling the trade lines of a consumer with good credit history to a consumer with bad credit history. This practice, which involves individuals who don't know each other, is called "piggy backing."

To illustrate, a credit repair company would arrange a rental transaction in which a consumer purchases the right to become an authorized user on accounts with good credit, thereby artificially boosting their credit scores. In many cases, such a rental transaction would raise a credit score more than 100 points.

The individual who rents the trade line is paid based on the quality of their credit. The arrangement does not allow the authorized user to make purchases on the card nor does the authorized user have access to any of the personal information associated with the account. After a couple of months, the owner of the trade line removes the authorized user from the account and resells it to another individual with problem credit. …

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