'Piggybacking' gets clemency from FICO
Controversial technique lets one consumer boost another's credit score
By Jeremy M. Simon
Piggybacking lives. Consumers who have good credit will continue to be able to boost others' credit scores by adding them as authorized users on credit card accounts through a practice known as "piggybacking."
Fair Isaac Corp., creator of the well-known FICO credit score, had announced last year it would end the practice due to abuses, but during Congressional testimony Tuesday, acknowledged it had changed its mind. A company official broke the news during a House Financial Services Subcommittee on Oversight and Investigations hearing entitled "What Borrowers Need to Know about Credit Scoring Models and Credit Scores."
"After consulting with the Federal Reserve Board and the Federal Trade Commission earlier this year, Fair Isaac has decided to include consideration of authorized user trade lines present on the credit report" in a revamped version of the credit score formula called FICO 08, Thomas J. Quinn, Fair Isaac's vice president of scoring solutions, said in prepared testimony. "Our scientists have devised a method to consider these trade lines while materially reducing the negative impact that could arise from piggybacking."
Evolution of piggybacking
Fair Isaac had previously announced that its FICO 08 scoring model would bar piggybacking. The technique enables consumers with no credit and those with poor credit to benefit from being added to the accounts of credit cardholders with good or excellent credit.
Piggybacking has been around many years. Traditionally, it was seen as a benign practice, used by parents to give their children a head start in building their own credit scores, or for one spouse to rehab the other's low credit score.
However, a few years ago, private companies sprung up to take advantage of the practice. For a fee, they would pair bad credit with good, adding bad credit consumers as authorized users on accounts of clients with good credit. The bad credit user never got to use the account or even see a credit card -- the simple act of being authorized is enough to boost the score. The middlemen charge a fee to the bad credit consumer, pay a lesser fee to the good credit consumer, and pocket the difference. The more the bad-credit consumers paid, the more lines they would be added to, increasing the size of the credit score boost.
The entry of the private middlemen outraged FICO and lenders, who likened their acts to fraud. Why? The practice artificially boosts credit scores, allowing people to get loans they wouldn't be able to get ordinarily -- and might not be able to pay off. That, the lenders argued, increased risk, making lending more expensive for all consumers.
Fair Isaac's Quinn provided his testimony alongside representatives from the three major credit bureaus: Stan Oliai, senior vice president of Experian Decision Analytics with Experian PLC; Richard G. Goerss, chief privacy officer and regulatory counsel with Equifax Inc. and Chet Wiermanski, group vice president of global analytical and decision systems with TransUnion LLC.
In a session that was largely educational in nature, committee members heard testimony from the credit bureaus about the various components of credit scoring models and the benefits of quantifying a borrower's lending risk. Questioning largely focused on the benefit of alternative credit data (from sources like telecom providers and utilities) to consumers with limited credit histories, the cost to consumers of purchasing credit scores and the differing models and scores provided by the three credit bureaus.
The major revelation from the testimony was the decision regarding FICO 08. While it came as a surprise, the thinking that went into the decision was straightforward. The abuses involved with piggybacking were a concern to Fair Isaac, Chief Operations Officer Mike Campbell said in a phone interview. Nevertheless, Campbell says, "It was very difficult to see at first if there was a way to compensate for that," while still maintaining the benefit to authorized users.
Fortunately, we were able to come up with technology that makes it much harder to game the system.
-- Mike Campbell
Chief Operations Officer, Fair Isaac Corp.
"We worked very hard with the credit bureaus and lenders to find how important it was to how many people," Campbell says. Fair Isaac maintained discussions with lenders during the process. "Fortunately, we were able to come up with technology that makes it much harder to game the system." As for what that technology entails, Fair Isaac was unwilling to elaborate.
In the midst of its work on piggybacking, Fair Isaac paused the planned rollout of FICO 08. The company began discussions with the credit bureaus once it was confident that its technology made manipulation more difficult and that the company could filter any misrepresentation. The timing of FICO 08's release is unclear and will vary depending on the credit bureau, but should be soon, Campbell says. "As soon as we get everyone on the same page, we'll get that out."
Whenever FICO 08 debuts, the recently announced change has a clear objective: "Keep good users of authorized credit and make it much harder for bad guys to game the system," Campbell says.
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