Thumbs up for FICO revision


August 05, 2008|By EILEEN AMBROSE

Fair Isaac Corp. is revising the formula for its widely used FICO credit score for the second time in a year.

This time, the company seems to have gotten it right.

Last week, the company said it would restore "authorized user accounts" when it calculates the FICO credit score. That's a reversal of a year ago.

"Two thumbs up," John Ulzheimer, president of consumer education for, says of this latest development.

Lenders use credit scores to determine whether to extend credit to you and under what terms. This score is so important that people with weak credit histories will pay thousands of dollars to a credit repair firm to artificially inflate their scores.

That's what Fair Isaac was trying to fight last year when it said it was changing its scoring formula and would no longer consider authorized user accounts when calculating a FICO score.

Authorized users of credit cards are able to charge purchases on the plastic, but they don't have to pay the bill. Spouses are often authorized users on one another's accounts. Parents usually add a college student as an authorized user so the student has a card on campus.

Being an authorized user has another advantage, one that Internet-based credit repair firms exploited. If you're an authorized user, you share the credit history of that card. So, if the card's owner has an excellent track record of paying card bills on time, you could see your credit score go up.

Credit repair firms became matchmakers between those with weak and strong credit histories. Consumers with lousy records paid $1,000 or more to be added as an authorized user for a few months on the card of a person with a high credit score. They never used the credit card. But as an authorized user, they could see their credit score go up by as much as a couple of hundred points and then apply for credit on more favorable terms. In turn, the card's owner got a couple of hundred dollars for his trouble.

"They were brokering relationships with complete strangers to fool the credit scoring system that this was a genuine relationship," Ulzheimer says.

Lenders were naturally upset. But Fair Isaac's original solution "was probably an overreaction," says Evan Hendricks, author of Credit Scores & Credit Reports.

More than 50 million consumers are authorized users on someone else's card. It was possible under the change that some consumers' scores could go down if they were authorized users on a card with a strong credit history, Hendricks says. Then again, some authorized users on a card with a poor record might have actually seen their scores go up, he adds.

Fair Isaac also estimated that up to 3 million consumers could have lost their score altogether. That's because if authorized user accounts were no longer part of the FICO calculation, then some consumers would not have enough information in their credit report to generate a score.

"That is a very bad thing not to have a credit score," says Ulzheimer, who once worked at Fair Isaac and was a critic of the change to the scoring formula.

Credit experts say young adults and women were most likely to be affected by the change because they are often authorized users.

When writing about these changes last year, it dawned on me that I was an authorized user on a card that I use for almost every purchase. That meant years of charging and paying off the balance each month wouldn't count toward my credit score. I immediately signed up for my own card.

The new scoring formula never quite got off the ground.

Lenders didn't like it, says Tom Quinn, vice president of global scoring solutions for Fair Isaac.

That's because lenders are required by law to consider accounts used by both spouses when determining the creditworthiness of one spouse. The old FICO formula made it easy to comply with the law, while the new one didn't, Quinn says.

Fair Isaac says its scientists went back to the drawing board and came up with a way that would keep authorized user accounts in the scoring formula yet would thwart attempts by credit repair firms to game the system. How they did it is a secret, Quinn says.

If Fair Isaac's new formula works as promised, those trying to buy themselves a better credit score will find that there's no quick fix to improving a weak score. They might have to do it the old-fashioned way.

One of the best ways to build a good score is to establish credit in your own name and pay your bills on time. Payment history accounts for more than a third of a FICO score.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or at

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