CreditXpert Inc. has released a new credit scoring system that has the ability to filter out authorized user accounts, allowing banks and mortgage lenders to see the difference in scoring when such accounts are removed.
The filter could drop many borrowers’ credit scores tremendously, either disqualifying them for homeownership or forcing countless high-risk borrowers into subprime loans, while helping lenders mitigate the risk of early loan default related to insufficient or poor credit history.
According to a statement on CreditXpert’s website, “With the CreditXpert AU Filter, lenders will be able to analyze credit files with authorized user accounts included in the analysis and analyze them again with these accounts removed.”
Over the past several years, many third-party companies have exploited a loophole that allows consumers to add positive lines of credit to their tattered or bare credit histories by making them authorized users on seasoned lines of credit, falsely increasing their own credit scores.
The practice, known as “credit piggybacking”, has allowed numerous borrowers to misleadingly inflate their credit scores by paying these companies a fee in exchange for a boost of hundreds of points in some cases.
CreditXpert says, “It is estimated that 30 percent of the 165 million scoreable credit files in the United States have at least one, but more commonly two to three authorized user accounts. CreditXpert Inc. estimates that 60 percent of those files will experience a credit score change when authorized users are not considered in scoring.”
While not all of these authorized user accounts are deliberately intended to boost credit scores, many borrowers with limited or poor credit bought tradelines prior to the loan process to up their scores and establish the necessary credit depth and score needed to qualify for particular mortgage programs.
Though the outcome is seemingly positive for borrowers who may not have previously qualified for a home loan, the risk to the bank or lender is unknowingly inflated.
The authorized user filter could play a key role in stamping out companies that sell credit, while eliminating one of the many loopholes remaining that skews a borrower’s true ability to repay a loan.
If you’re concerned that your credit score is reliant upon authorized accounts such as though shared with a family member or a spouse, consider changing them to “joint accounts” or build your very own credit to ensure your score won’t be affected when these changes take place in the future.
Qualifying for a home loan is going to become a lot more difficult, so make sure you prepare yourself for the upcoming changes.