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How could a stranger be an authorized user on another stranger's credit card account? The phenomenon is a byproduct of our capitalistic system.

"The unscrupulous got ahold of the idea and started charging people with poor credit a fee to be added on to a person who has good credit. I am certainly foursquare against that, but as far as the legitimate use of piggybacking, I don't have a problem with it," Cunningham says.

The practice was due to be banned -- at least as far as the benefit to credit scores -- in the updated FICO 2008 scoring model. However, the change did not end up in the final design, so legitimate authorized users continue to benefit from the system.

Use alternative credit scores
In 2004, FICO introduced the Expansion score as an alternative to the classic FICO score to reach the unbanked market. It uses alternative payment data to compile a score for consumers.

"Instead of relying on one credit bureau's information, the Expansion score instead pings a number of small specialized credit bureaus that keep track of fairly interesting things -- but those things are usually not something that consumers are aware of being tracked by credit bureaus," Watts says.

For instance, the kind of information included could be gym memberships, payments to utility companies, or rental payments to a landlord or apartment management company.

(One such alternative credit bureau is PRBC, recently acquired by MicroBilt. Both companies cater to small and medium-sized businesses. PRBC compiles data provided by consumers, while MicroBilt receives trade line data directly from small businesses.)

Besides the Expansion score, there are other, similar, scores available to lenders, but so far none are as widely used as the conventional scoring models measuring traditional credit data.

"When you introduce any new technology or advancement for lenders, they spend a long time kicking the tires," Watts says.

"Some credit card issuers are using Expansion scores today, but the score hasn't really taken off with mortgage lenders," he says. The reason: Fannie Mae and Freddie Mac have had an enormous influence on the risk-management tools lenders use and require specific scoring criteria before purchasing mortgages.

Until the new scoring models are widely accepted, consumers with little to no credit may be able to benefit from them in building their credit histories, but they likely won't be offered a mortgage on the strength of that score alone.

However, over time, as the Expansion scores prove their predictive abilities, lenders will be more likely to use them.

-- Posted: Jan. 26, 2009
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