Forget about those online pitches that claim to raise FICO scores by hundreds of points in weeks-opening the door for unscrupulous home buyers to qualify for a lower mortgage rate than they actually deserve.
Fair Isaac Corp., the developer of the FICO score, is preparing to pull the plug on schemes that allow high quality credit card histories to flow into the credit files of people with bad credit, thereby boosting scores. The target: dozens of websites that give cash to credit card holders with excellent payment histories when they allow the websites to "rent" their cards out to people with poor credit for up to 90 days.
Fair Isaac's public affairs manager, Craig Watts, said that beginning in September, the updated FICO scoring model no longer will consider credit card "authorized user" accounts in computing scores. When card holders rent out their cards, they are actually agreeing to add credit-repair clients of the website as authorized users. Authorized users get to share the primary card holder's full payment history on the account, but they do not necessarily have physical access to the card itself. All the on-time positive payments of the primary card holder flows into the credit repair clients' own credit files at Equifax, Experian and Trans Union-the three national credit repositories. That, in turn, raises their credit scores using the traditional FICO model.
As a real-life example, last Thursday a person with a subprime 580 FICO score who applied for a $300,000 30-year fixed rate home loan would have been quoted an average interest rate of 8.9 percent ($2,393 a month in principal and interest.) An applicant with a 700 FICO score, by contrast, would have been quoted around 6.56 percent ($1,912). This is based on a national survey of lenders conducted for Fair Isaac and published on its website, myfico.com.
Just a 120 point score boost, in other words, would get an applicant a much lower mortgage rate and save nearly $500 a month in payments -- nearly $6,000 the first year alone. FICO score-boost websites will rent someone else's card history for a one-time payment of anywhere from $400 to $2,000, with the price tied to the age and the maximum credit limit of the card account. The longer the cardholder's excellent payment history and the higher the limit, the more it costs and the bigger boost it delivers.
Federal law permits authorized user accounts, but does not prescribe limitations on how many authorized users can be attached to a single card, and does not specifically prohibit rentals of tradeline accounts for limited periods of time by profit-making entities. Some websites claim card holders can earn "$10,000 a month or more" by renting out their cards to large numbers of authorized users-99 in one extreme case.
However, federal and state regulators have warned mortgage lenders and brokers to be on guard against such schemes. Though the websites may be exploiting a loophole in the law, regulators say, home buyers and loan officers who submit mortgage applications with artificially inflated FICO scores are violating multiple statutes-bank fraud is tops on the list-and could be prosecuted.
The Federal Trade Commission has been studying the situation for months, but has not moved against promoters of FICO boosting. The National Association of Mortgage Brokers has asked Congress to change federal law to remove what one association official called "an open door to fraud."
In the meantime, however, Fair Isaac itself, by tweaking its latest model to ignore all authorized user accounts, believes it can solve "most of the problem," according to spokesman Watts.