Renting out your creditworthiness
June 4th, 2007 | by mbhunter |Want to buy a house? Don’t have the best credit history? Don’t even have a passable one?
No problem! Just borrow some stranger’s stellar credit history, apply for a loan, get a rate you can afford, and give the credit history back when you’re done with it!
Sound too good to be true? Well, it’s happening right now, and it actually even seems to be legal.
Recent tightening of lending practices have disqualified many would-be homeowners from getting the green to buy a house. Because of the way the Fair Isaac Corp. (FICO) score is calculated currently, a high-risk borrower that becomes a registered user on a credit card account belonging to a highly creditworthy person has is helped. Companies exist that bring together poor credit risks with excellent credit risks, collect a fee from the poor credit risks, pay out a part of that fee to the excellent credit risks for allowing the poor credit risks to become registered on their credit accounts temporarily, and pocket the difference. The poor credit risk sees a nice jump in his/her FICO score, qualifies for a nice rate on a mortgage, and rides off into the sunset.
This trick had been around for a while, but it was usually between family members, like a father and son. The danger with this for the person with good credit is that any defaults by the person with bad credit will affect both credit scores!
Lenders, naturally, are very concerned about this practice since this clouds their risk assessment, and will likely result in more defaults than would otherwise happen. The last thing lenders need these days is more defaults!
Some comments:
- It’s quite a business model that these credit repair organizations have. I suppose there will always be a market for an easy way out of financial problems.
- This won’t last for long. Either the FICO scoring method will be revised or the practice will be made illegal under certain conditions, perhaps if the two parties aren’t related or if the co-signing is cancelled within six months.
- Why would people jeopardize their good credit like this? For money, maybe, but it’s only $100 or so! Most of the money goes to the credit repair company.
- Why would the people with bad credit do this? If the bad credit score is beyond their control, then it might be worth it. But if it was low for good reason — like they skipped on their bills — then that should be a hint that credit is not their friend!
- Why is this such a huge danger for lenders? The FICO score is one measure of creditworthiness. Unfortunately lenders offer “60-second decisions” based on the numbers alone. This weakness, and the weakness of the FICO score, are what gave rise to this credit repair business. If the lenders slowed their approval process a little, then the loan officers could stand a chance of catching this.
Now if I could just put my hand on a thin person’s head and lose weight …
5 Responses to “Renting out your creditworthiness”
By Chris on Jun 5, 2007 | Reply
I find this a bit despicable. The article does say that the FICO scores are going to be revised to exclude authorized users. So thanks to impatient adults unwilling to wait to rebuild their own credit, they cheat and eliminate this convenient, safe way for parents to help their children build initial credit.
And if this is allowed to continue, the FICO will no longer be a good indicator of real credit worthiness, so the entire system becomes useless.
By tarragona on Jun 5, 2007 | Reply
I think FICO is useful. They should give attention on this so that it won’t become useless. My friend from cadiz spain give me this link about FICO. And I think this information from wikipedia can also help a lot to others.
By John on Jun 6, 2007 | Reply
Fair Isaac has reportedly closed this loophole according to an article in today’s St. Paul Pioneer Press.
By hustler on Jun 6, 2007 | Reply
it looks like the credit industry is catching up with these shady practices.
By credit card business on Jun 13, 2007 | Reply
I would never lend my good credit history to anyone even if they offer me a big sum. I think I would never make up for the loses if there are any. And you can be sure the person using your credit history is very likely to make debt. Such people are reluctant to change their spending habits.