Wednesday, November 7, 2007

Piggyback Credit Schemes

If it's legal, is it still cheating? Lenders continue to be misled by borrowers who use piggyback credit schemes to inflate their credit score. The scam goes like this: Piggyback credit companies pay credit card holders with superior payment histories to open up their account to authorized users. The user has no actual access to the credit card account, but as a listed user, the positive payment history ends up on the users credit history. Piggyback companies claim that this can raise credit scores by 100 to 200 points within 30 to 90 days. What does this mean to lenders? It means that high risk, poor credit consumers receive better rates and loan terms, and lenders are underwriting higher risks then they know. How prevalent is this? It's hard to say. But if it is being widely used by borrowers, it certainly doesn't help an industry already reeling from defaults, foreclosures, and fraud.

The FTC has made no ruling on the legality of these plans, so as of now, there doesn't seem to be an end to the deception. Fair Isaac, the developers of the FICO score most commonly used for mortgage underwriting, has been working on a new scoring model to combat the schemes. However, the new model has yet to be released.

No comments: