One of the main determinants of the interest rate you’ll be charged on a loan for the purchase of a primary residence or an investment property is the strength of your FICO Score. FICO Scores range from a potential low of 400 to a high of 850. Your score generally rises as the length of your total credit history increases and as you demonstrate your dependability as a bill payer to make your scheduled payments on time. When the length of your credit history is short or when you begin missing payments to creditors, your credit score decreases, thereby warning lenders of the additional risk they’ll likely be taking on by lending to you. Many lenders will gladly lend to higher-risk borrowers provided the borrower is willing to pay dearly for the loan.
Though the formulas the Fair Isaac Company use to calculate the FICO score, which they invented, are extremely complex and secretive, many investors have discovered at least a few loopholes in the system, which they can exploit when needed to quickly raise their credit scores in advance of major purchases. One such loophole has been to copy someone else’s very positive credit history on certain trade lines on to their report by being added as an additional user for the account. For example, if an 18-year-old had a very poor credit score simply because they were establishing their credit for the first time and lacked a history of borrowing and repaying, they could request that their parents add them as an additional user on some of the accounts they’ve had perfect payment history on for many years. If the parents agreed and added their child as an additional user, their full payment history for the account would be reported on the child’s credit report, most likely giving their score an enormous boost! By using this technique, this 18-year-old could go from having no credit history to having many years of timely payments on their report, which would make potential lenders much more comfortable in offering their best rates to them.
Many investors have used similar practices to improve their scores, and in some cases, lenders have been left holding the bag when they offer their lowest rates to some people who didn’t truly deserve them based on their own true credit history. These complaints have now found their way back to the Fair Isaac Company, who now plans to release a new score calculation model in September of 2007 that will ignore trade-lines where you are simply an additional user when calculating scores.
This change is happening to stop a potential problem before it balloons into something much larger and more dangerous. While I’m sure they’d rather not have a parent boost their kids’ scores by allowing them to borrow their credit history, their larger concern is with for-profit companies that are starting to facilitate the renting of people’s credit. Online companies have been popping up which will pay people with very established trade-lines that are reporting favorably to add their client to their accounts as additional users in an effort to artificially boost their credit scores and their borrowing power. The cost of such a service is reportedly between $400 to $2,000. Some of those that accept payments in exchange for adding users on their accounts are said to make as much as $10,000 a month for their trouble. With no shortage of supply or demand in this new business, Fair Isaac felt that they had to act quickly to stop the spread of the practice and to protect the lenders that depend on the data they provide.
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