Changes to FICO formula aimed at preventing credit renting.
Over 30% of consumers may feel the impact.

In an effort to maintain the integrity of their credit-reporting formula, Fair Isaac Corporation (FICO) has announced a major change to their formula to be implemented later this year.

Unbeknownst to most consumers, many unscrupulous credit repair agencies have employed a practice called credit renting. This process benefits a poor credit score client by having their name added to a good credit score account as an authorized user. The agency and account holder collect a fee and the client receives the benefit of increased credit score by association. Obviously unethical, another term can be applied to this practice. Fraud.

Since FICO is looked to by the lending institutions to provide accurate assessments of individuals credit position, they were the ones to strike the first, and probably final blow in this credit manipulation battle. In late 2007, FICO will test their new formula with one of the three major credit-reporting agencies. This undisclosed agency, Equifax, TransUnion or Experian, will install the new update to FICO’s formula and will thus stop applying any positive benefit to authorized user accounts. When the other two agencies install their new updates, probably in early 2008, the credit renting game will be over.

So chalk one up for the banks. They will have successfully banished one fraudulent activity. With a little ripple effect.

30% of the population of the United States has at least one account on their credit report listed as an authorized user. The credit accrued on those accounts will disappear. These are spouses, children and grandchildren who are about to see their credit score take a major drop. Those people about to be impacted must take quick steps to shore-up their credit before this update takes effect. Spouses will probably be the hardest hit group. It is, and has been, a very common practice to have a household’s financial activities grouped into one of the partner's account. This update will significantly lower the credit rating of a large portion of these spouses.

To limit the ensuing damage, current authorized users should quickly establish their own credit. Since credit history is a major portion of the FICO formula, it would be well advised to open a new account with the same lending institution as the current authorized account. If required, have the main account holder commit to the new account as a co-signer. A sub-prime credit card or affinity card may also be a good solution for those unable to qualify for a main-stream account.

Spouses may have a unique opportunity to re-establish their own credit. When applying for their own credit card, most applications will ask for household income, the combined income of both partners. They also will probably have an occupation of home maker that can be selected. By using these items and adding the bread-winning spouse as a second cardholder, your chance of getting approved are very good.

Once again, by using an institutional hand-grenade to eradicate the pesky ant, masses of innocent people will suffer the fallout. Banks will see an almost insignificant reduction in defaulted loans while nearly one-third of the population will see their credit scores and wallets impacted.

Credit card blocks can cause major problems.
Learn what they are and how to avoid them.

Most Frequent travelers know all about credit card blocking, many from painful first hand experience. Hotels post notices of their policy regarding blocking, usually in the form of an obscure plaque some clerks will point to when an inquisitive visitor checks in. Car rental companies rapidly recite their policy to callers wanting to reserve an SUV for the family vacation. Still hundreds of unsuspecting consumers will feel the pain of credit card blocks every day. So what exactly are these blocks?

Credit card issuers, as a way to reduce their risk, can set aside or "block" an anticipated future charge. This block is not immediately charged to the account but it reduces the amount of credit available. Plus the amount of the block may be more than expected as the bank may add in additional estimated charges such as gasoline for a car rental or food for a hotel stay. Even a pay-at-the-pump transaction can cause a $100 block to be placed on a card. These blocks or "holds" can cause for some rather difficult imes if you unknowingly end up in the wrong situation.

Suppose you are flying to Las Vegas for the weekend. Assuming you have not yet acquired high-roller status, you will need to reserve a flight, car rental and hotel room. Each of these reservations will cause a block to be placed on your ever-faithful rewards credit card. Then in an effort to smooth-over the news of your impending excursion, you take your significant other to the finest restaurant in town. Imagine your surprise when waiter lets you and the patrons in a two-table radius know your charge has been declined.

Another, and even more heinous scenario, would have the person securing these future charges with a debit card. Each reservation would have placed a block on the checking account underlying the credit card. Then the flowers, dinner, cab fare and concert tickets would have all generate separate overdraft charges. Not to mention any checks clearing during the time the blocks are in effect. Ouch.

The most logical way to avoid any blocking problems is to maintain a balance well below the usable limit of your credit card. Although this is prudent advice it may not always be practical considering the somewhat undefined amounts and timing of the blocks. One tidbit that is unwavering is that reservations should not be placed on a debit card. Ever.

Another potentially better technique to avoid this trap is to have a spare credit card. A method employed by many, a spare credit card can be used to place all the reservations thereby protecting the available credit of your preferred card. Then when the actual charges are made the favorite card can be used and any rewards can be accumulated. An additional benefit is the block transactions provide activity on the spare card furthering its value as a tool to enhance your credit score.

Like many credit related issues, knowledge and a little foresight can go a long way in preventing unexpected problems and expenses. Now that you have the knowledge, this would be a good time for a little pro-active action to ensure you do not fall into the credit blocking trap.

Capital One will start to report credit limits.
Will this policy affect your credit score ?

Back in June FICO announced they would be rolling out a new formula for calculating their credit score used by all three major reporting services. This updated product would no longer consider an authorized user account as a valid card holder and any credit information about the authorized user would be dropped. This seemingly minor change is expected to affect over 30 million US cardholders, inducing a small to moderate drop in their credit scores.

Now Capital One has announced they will start, for the first time, reporting the credit limits of their card holder accounts. But how does this affect you?

This recent policy change by Capital One will probably alter the credit scores of many cardholders. Since FICO bases around 30% of their score on credit-to-debt ratio, having accurate credit limit data available will make their scoring product more accurate. The real impact though will be mostly unknown until the changes are made and have had a chance to work through the FICO system and roll out to the credit reporting agencies.

Currently only Capital One and American Express withhold credit limit information when reporting account data to FICO. The effect of these policies is widely disputed. Some argue that not having the credit limit amount available causes FICO to arbitrarily assign the outstanding balance as the credit limit. This would cause all AMEX and Capital One account holders to appear as though there cards were always "Maxed Out" or at their limits, a condition likely to severely harm one's credit score. They also believe that when Capital One starts reporting the credit limits, their account holders will enjoy a miraculous increase in their FICO score and consequential reduction in interest charges.

This writer believes otherwise.

Fair Isaac Corporation (FICO) has been in the business of evaluating consumer credit-worthiness for over 50 years and employs nearly 3000 people. FICO credit information is used by 99 of the top 100 US banks to base the decisions of billions of dollars each year. The method for determining a FICO score is not a clear cut, simple formula. It is a large, dynamic algorithm that FICO stakes their reputation and future on. It is also adaptive, predictive and a closely guarded trade secret. I, personally, am convinced that FICO handles Capital One and American Express data correctly and estimates an accurate credit limit. This is further substantiated by the fact that American Express customers do not suffer undue harm by the AMEX policy of not reporting limits. In fact, having an AMEX card can be a major boost to your credit score.

Let's look at just one small example of how a credit limit can be estimated. Suppose four months ago you used your Capital One card to purchase a new 60" plasma TV for $3000 dollars. FICO would see this transaction and apply a credit limit of at least $3000 to your account. The actual limit would probably be some percentage higher based on the likelihood that you did not max the card out. This limit would remain on the account, maybe fluctuating with your general credit score and current financial situation. Do not forget that FICO has access to a very large amount of data over a very long period of time.

When the smoke clears from this latest reporting change, the scores of most Capital One customers will likely remain about the same. Some will go up a little and some will drop slightly. Perhaps a more interesting discovery will be to see just how well FICO has been doing in estimating the credit limits of these two company's account holders.