Potentially millions of consumers will soon see a change in their credit score, and in some cases it might disappear altogether.
It's not because of anything they've done.
Rather, the formula for the widely used FICO credit score is about to change. Fair Isaac Corp., creator of the FICO score used by lenders, says it will no longer consider authorized user accounts when factoring a consumer's score.
An authorized user of a credit card is free to use the plastic, but doesn't have to pay the bill. Parents often make a child an authorized user of their card to give a youngster access to credit. But this has other perks. The child inherits the parents' credit history. And if it's a good one, the child receives a high credit score.
But some Internet-based credit-repair firms have been using this to boost the credit scores of strangers with poor credit. The firms pay a person with an excellent credit score to add someone with a rocky record as an authorized user on a card for a few months. The authorized user doesn't ever use the plastic. Instead, he or she gets the benefit of the account owner's credit history, which can raise a weak score by a couple of hundred points.
People were paying $1,000 to $1,200 to "rent" another's credit history, says Evan Hendricks, author of Credit Scores & Credit Reports. "It shows you how important that credit score is."
Lenders cried foul. And Fair Isaac, which was tweaking the credit score formula anyway, is dropping the recognition of authorized users in its scoring. Some other credit scores from other companies already don't consider authorized user accounts.
Experian will offer this new FICO scoring model beginning next month, says Maxine Sweet, Experian's vice president of consumer education. Other major bureaus, Equifax and TransUnion, are expected to adopt it next year.
Fair Isaac spokesman Craig Watts says about a third of the 165 million consumers eligible for a FICO score have an authorized user on their account.
The impact of no longer factoring authorized accounts into a FICO score will depend on the consumer, Watts says.
The higher the score, the better credit terms a customer can get. A score could drop if the authorized account that is removed was in good standing with a low balance, he says. But the score could go up if the authorized account had a poor track record.
Worse for some, the change will mean no FICO score at all. Fair Isaac estimates 1.5 million to 3 million consumers will no longer have enough information in their credit report to be able to produce a FICO score.
Among those most likely affected are young adults who have been added to their parents' accounts. If you're among them and don't have a credit card on your own, then you can take steps to build a credit history that will eventually allow you to get a favorable credit score.
And a score is important even to those just starting out.
'"It's going to help them rent an apartment or buy a house when they move out of the dorm," says Gerri Detweiler, author of The Ultimate Credit Handbook. "It might help them get the job they want."
How can young adults start building a credit record of their own?
Those just coming out of college with student loans can use repaying those loans on time as a way to build a good credit history, says David Rubinger, vice president of communications with Equifax.
"If they already have a savings or checking account with a bank, go there and inquire about a credit card," Rubinger says.
If the bank is unwilling to trust you with a credit card just yet, apply for a so-called secured card, experts say.
With this, you make a deposit in the bank, usually $250 or so, and that becomes your line of credit on the secured card, Detweiler says. Use the card responsibly and you could qualify for another type of card in six months.
You might also be able to get a card with a low credit limit from a retailer, Rubinger says. Again, using the card and paying it off faithfully builds good credit.
Another option is for a parent to add you as a joint account owner of a card. This is a double-edged sword. As joint owners, each of you will be liable for the bill.
Detweiler suggests making this a short-term arrangement, say, about a year. That will give you enough time to develop a track record and then get credit on your own. It also will remove the risk that years later you or your parent will be responsible for the other's debts.
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