Bad news for credit piggybackers

Roadblocks prevent authorized card users from buying homes

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jan. 3, 2011

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Roadblocks prevent authorized card users from buying homes

Jack Guttentag
Inman News™

Q: The underwriter assigned to my mortgage has rejected it on the grounds that my excellent credit score may be due to my being an authorized user on my grandfather's credit card. My own credit record is perfect but so is my grandfather's, and the underwriter says that unless he can get a credit report based on my credit record alone, my application will be rejected. What do I do?

A: My advice is to take yourself off your grandfather's card. The only other option is to change lenders, but that will cost you and there is no assurance that another lender would look at matters differently.

An "authorized user" is someone a credit card holder allows to use his card. There are about 50 million of them. The cardholder is responsible for the charges of the authorized user, while the authorized user is not responsible for paying any charges, including his own. An authorized user is different from a co-applicant, who is responsible for paying all charges, including those made by the principal cardholder.

Cardholders have a variety of reasons for allowing someone, usually a family member, to use their card. In the past, one of the more questionable reasons was to boost the credit score of the authorized user. The algorithm developed by the Fair Isaac Co. to determine credit scores, called the "FICO score," credited authorized users for the payment record of the principal cardholder -- whether good or bad.

I doubt that your grandfather made you an authorized user for that reason, but regardless, your credit score was increased by his good payment habits.

The rationale for this has to be that creditworthiness is transferable from cardholders to authorized users. Your grandfather had good credit, and his willingness to be responsible for your bills means that you are also a responsible credit user. Whether there is evidence to support this idea, I don't know.

The Vantage Score, developed in recent years as a competitor to the FICO score, does not credit authorized users with the payment record of principal cardholders.

The FICO approach of connecting the two does have some plausibility if the cardholder and authorized user are family-related or personal friends, but that is not always the case -- they may not even know each other!

Some credit-repair firms learned how to game the system by connecting potential borrowers who needed a higher credit score to cardholders with good credit who would place authorized users on their cards. The potential borrower paid a fee to the intermediary who passed some of it on to the cardholder. Risk to the cardholder is small because the authorized users do not actually receive cards.

To eliminate this practice, Fair Isaac announced in September 2007 that its forthcoming version of FICO would exclude authorized user accounts. But in July 2008, it reversed course and said it was going back to the previous system, though with new safeguards against the type of abuse described in the preceding paragraph. How exactly it would eliminate the abuses it did not say.

Fair Isaac attributed its change of mind to complaints from lenders. This is ironic because some lenders including the one you are dealing with do not accept the Fair Isaac premise that the credit worthiness of cardholders and authorized users are positively related. That lender's underwriter wants a credit score for you that isn't affected by your grandfather's payment record.

To a great extent, your problem reflects the current market environment. Before the financial crisis, an underwriter assessing the credit of an authorized user would assess the borrower's own payment record, and if it was extensive and good, would use his discretion to approve the loan.

Today, lenders are fearful that, if the loans they sell don't conform exactly to the underwriting rules, they will be forced to buy them back at a considerable loss. To minimize this risk, they have forced their underwriters to become rigid and rule-driven, with minimal scope for judgment calls.

In any case, it probably is time for you to stand on your own feet.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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