Many financial institutions rely heavily on the FICO scores, which were developed by the Fair Isaac Corp. The scores are extremely important as they help businesses determine your credit rate or if your loan should even be approved. FICO programs are sent to the "big 3" credit reporting agencies. The three, Experian, Trans Union and Equifax all take the FICO program and create a FICO SCORE. One score from Equifax might be 20 points higher than Experian. Credit Scores range from 500 to 850, with 850 being the highest credit rating.

FICO scoring, based on information supplied to the credit reporting agencies by Fair Isaac Company has undergone a major change in response to what is called "Credit Piggybacking". For example, Joe has a terrible credit score and he needs to raise it 40 or 50 points. He calls Grandma and asks to be added as an "authorized user" on her credit cards. She says yes and adds him on. He now is connected through the credit reporting agencies as a better credit risk because he is on Grandma’s cards and Grandma pays her bills responsibly.

Normally Joe would be seeing a bump of 50 or more points on his credit score, but wait! He is still a bad credit risk and legally using someone else’s credit history to his advantage.

Investigators have recently been going over the credit reports of homeowners who have defaulted on mortgage loans. They found cases where mortgage holders were getting "positive" credit data on credit accounts that were opened before they were born! They had their FICO Scores artificially elevated through this tactic.

According to Credit.com, 60-75 million people will be affected by the change. This is significant for young adults trying to build credit with the use of a parent’s credit card. It will also impact others who are attempting to rebuild their credit by tapping into a family member’s good credit.

If you are in the market for credit in the near term be prepared for conflicting Credit Scores from the reporting agencies.

There are things you can do now to safeguard or help prevent a drastic change in your current score:

• Young adults need to repay student loans on time. They can also go to the bank where they have an existing account and apply for a credit card or secure card.

• A parent has the option of adding a child as a joint account owner on their card; however both parties are liable for the bill.

• Get a retail store’s credit card, but be sure to pay the bill on time and in full.

• If you are currently an authorized user on a spouse’s card, you can have the card changed to a joint account. Just remember that if you need to remove one of the users, the primary account holder must close the account then open a new one.

No matter what changes are coming, paying your bills on time, minimizing the number of accounts, and maintaining low balances (under 50% of the credit line owed) are the key to keeping your credit score high.

Source: Inman News

You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.