Credit Renting: How Piggybacking On Someone Else's Good Credit Works

As credit scores take more important role in many parts of our lives, more ideas are popping up everyday to boost our credit scores. Recently, some borrowers with low credit scores are turning to a fast-growing business on the Internet: “Credit Renting”  It’s like transplanting the credit DNA of people with excellent payment histories into the credit files of people with poor histories

The companies boost the client’s score by arranging for him/her to be added as an authorized user on several credit cards of people with stellar credit who were paid to allow this coattailing.

The companies claim to raise FICO credit scores by 50 to 250 points, or more, by adding low-scoring borrowers as "authorized users" onto the credit card accounts of people with FICO scores higher than 700. The positive payment information from such cardholders then flows into the files of the people with bad credit.

According to an AP report, a Florida man who paid $1,800 for three credit card spots, got his FICO score jumped from 550 to 715 in just two months. He was finally able to close on his mortgage with 7.5 % APR with no down payment.

This tactic has been, however, a well-known practice for parents add to their kids as authorized users on their credit card accounts. Besides letting them buy textbooks, this can boost their credit scores because that larger and long-standing credit line will show up on their borrowing history as if it were theirs.

Credit renting is possible because authorized users don’t have to be related to you and there is no limit on how many authorized users you can. Authorized users have no liability for payments, and do not have to undergo a credit check before being added to an existing account. Currently there’s no strict law against the rental or sale of authorized-user designations.
                                                                                                                

The Anatomy of Credit Renting

The effect on a credit score can vary depending on what else is in a person’s report. But one borrowed credit card account can increase a score from 30 to over 200 points, according to a credit-renting company, reports AP. That's because the computer program that calculates scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps lift the credit score.

Once the credit card company files an updated report to credit bureaus - leading to a higher FICO score - the credit renter is removed from the account of the person allowing the piggybacking. However, the credit card's payment history remains on the authorized user's credit report forever, and lenders have no way of knowing how the credit borrower is related to the cardholder.

With an augmented score, consumers can save a consumer an enormous amount of money  because they are able to receive lower interest rates on mortgages, car loans or personal loans. Typically, a higher credit score means not just a lower interest rate but it can mean the difference between qualifying for a loan or not.

Business Unusual

Matching desperate borrowers and greedy cardholders has become a lucrative business these days. The companies promoting "credit renting" match a client up with someone else's credit for a fee. Web sites had sprung up to act as "matchmakers" between people who wanted to improve their credit and people who have excellent credit and were tempted to earn some extra money every month by allowing these deadbeat strangers to become "authorized users" on their credit-card accounts.

The person with a low credit score pays a fee to rent a spot as an authorized user on a stranger's account. The payment for the person allowing the piggybacking on his or her credit history depends on the quality of his or her credit line.

The Web sites of the companies that promote this dubious product proclaim that they can, in less than 90 days, raise your credit score by more than 200 points.

“Credit Renting” Effect Will Soon End

However, this business is soon to be over as lenders and industry officials raised concerns over credit renting and a new scoring model is coming. Fair Isaac Corp., the developer of FICO score, announced it will change its credit scoring system beginning later in 2007 in a way it contends will end this “credit renting” effect.  The company plans to introduce the new scoring methodology in September to one of the three major credit reporting agencies,  and the other two reporting agencies will receive the update some time in 2008.
 
When they close this loophole, it will eliminate millions of authorized users and their scores will go down.