Monday, November 26, 2007

Loophole Must be Closed on Misleading Credit Abuse

by Nancy Osborne, COO of ERATE

An inadvertent loophole in the federal Equal Credit Opportunity Act (or (ECOA) has provided an open invitation for those seeking to abuse and profit from it. The Act permits the use of what's referred to as an "authorized user" account to establish a credit history rather than actually having to open credit in ones own name, this essentially allows someone to hijack the credit history of another person. Becoming an authorized user on an account opened by someone else (even someone not related to you) allows the authorized user to transpose the account holder's credit history and make it their own seemingly through osmosis. Absurdly the authorized user may not even have physical access to the account but is only noted as being an authorized user by the legitimate account holder. ECOA does not have any limitations on the number of authorized users permitted on an account and does not prohibit the outright rental of authorized user accounts by persons having legitimately opened an account.

This is a shamefully misleading practice which credit repair companies have exploited to its fullest potential. These companies claim they can raise a less than stellar consumer's credit score by as much as 200 points in one to three months time. This feat is accomplished by despicably offering to pay a person possessing great credit a hefty rental fee, up to $2,000 in some cases, in exchange for being added as an authorized user on one of their accounts. Because the credit scoring system makes no distinction between the authorized user and the actual account holder, the credit history on the account is now seen as one and the same for both parties. This seemingly fraudulent practice is commonly referred to within the industry as "piggybacking".

Both Fair Isaacs (developer of the FICO Score) and all three major credit bureaus have products in the works which will discount this practice when reporting an individual's credit rating but no changes have been rolled out currently nor are any being widely used within the lending and credit industries. Appallingly lenders and creditors alerted both legislators and bank regulators to this problem some time ago but no action has been taken to make the practice illegal. Hopefully Fair Isaacs and the credit bureaus will be able to introduce their new systems and eliminate the faulty and misleading credit enhancing impact of this practice sooner rather then later. In the meantime the opportunity to abuse the system exists for those who wish to take advantage of and profit from it.

Those wishing to improve their credit scores will still be able to do so the old fashioned way. Note that even borrowers having filed for bankruptcy have been able to dramatically improve their scores and become "prime" borrowers in some cases within a period of only three years. By using credit wisely ones credit score can rebound with surprising resiliency. Using credit wisely means keeping the number of new accounts to a minimum, not closing any older accounts which reflect a good credit history and wrapping them into new accounts, also keeping the outstanding balances on all credit cards limited to a ceiling of 65% of the maximum limit allowed on the account. By following some simple guidelines you can turn a negative credit history into a positive one without having to pay someone you may not even know personally for the unethical privilege of hijacking their credit profile.

For those persons who lack a credit history altogether and would therefore have difficulty obtaining a credit score, Fair Isaacs (developer of the FICO Score) has created a new FICO expansion score to gage the creditworthiness of those persons having minimal to no information reflected with any of the three major credit bureaus. Rather than using traditional credit card and loan payment histories to calculate a FICO score, the new expansion score is obtained by using alternate credit sources such as utility bills along with checking account management histories. This new scoring system will make life considerably easier for young people just starting out as well as those persons who are new to the country. Many credit card companies, as well as auto financing sources, have begun to accept the expansion score however it has yet to be widely used and accepted by mortgage lenders at this time but the hope is that this acceptance is coming in the near future.

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