Last week Fair Isaac announced that its latest credit-scoring model, dubbed "FICO 08," will include authorized user accounts when calculating someone's FICO credit score.
The company estimates that 50 million consumers are "legitimate" authorized users on someone else's credit card. Legitimate authorized users have a relationship with the primary accountholder and a reason to share access to the account, such as spouses, and parents and children.
FICO 08 was originally designed to ignore authorized user accounts, in an effort to stem "piggybacking" on a stranger's credit card and artificially inflating one's score. (Editor's note: All previous stories describing the design of FICO 08 to exclude authorized user accounts were based on information that is now outdated. At the time of this writing, FICO 08 will include authorized user accounts in scoring.)
Previous versions of the FICO scoring model included authorized user accounts in scoring. Some credit repair firms exploited that loophole, and offered a way for folks with bad credit to raise their FICO scores. The consumer would pay thousands of dollars to get added as an authorized user to the credit card of someone with a stellar credit history. When that account showed up on the authorized user's credit report, the person's credit score would rise. Typically, the authorized user would not receive a credit card. Rather, the consumer paid to get a credit score boost.
Why the change
Fair Isaac said lenders complained that using FICO 08 would inhibit compliance with Federal Reserve Regulation B, which requires lenders assessing a married person's credit risk to consider the credit history of accounts shared by the spouses.
Fair Isaac is keeping the specifics of their new analytic approach secret but says they've found a way to restore authorized-user accounts to the formula but also reduce the impact of piggybacking.
"The FICO 08 scores of legitimate authorized users will now reflect the information on their credit reports about the account(s) on which they are authorized users," says Tom Quinn, vice president of global scoring solutions for Fair Isaac.
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A competing scoring model called VantageScore, which was created by the three major credit reporting agencies, has never considered authorized-user accounts in its scoring. "VantageScore excludes authorized-user trade lines, whether with good or bad payment histories, to ensure the risk assessment of a credit applicant represents the true credit risk of the prospect and not the originating borrower with whom the authorized trade line is associated," says Barrett Burns, president and CEO of VantageScore Solutions.
Burns says VantageScore complies with Regulation B since "lenders do not have to consider the credit history of spousal authorized users unless the information is available." Credit reports don't indicate the existence of a spousal relationship between authorized user and accountholder.
How the change impacts you
Fair Isaac's announcement should please consumers whose credit history largely consists of authorized-user accounts. "The millions and millions of consumers who would've seen their scores go down are not going to see that happen," says John Ulzheimer, president of Credit.com educational services.