Kurt wanted to buy a home for his wife and two children -- and he wanted to do it through a mortgage he could afford. But the 44-year-old Chicago man had spent time in prison on drug charges and hadn't been able to build up a credit history.
Kurt -- who asked that his last name be withheld to protect his family's privacy -- said he had turned his life around after prison. But, when it came to buying a home, his low credit score meant that he faced what he called "ungodly" high interest rates of 12 to 13 percent.
So, he sought out a controversial solution: Kurt found a company that helped him "piggyback" off a stranger's credit card by signing him on as an "authorized user" to the account. Having his name attached to a new line of credit, Kurt said, boosted his credit score. That boost, he said, allowed him to qualify for a home loan with an interest rate of just 6.9 percent.
"I was able to move forward from there to become a homeowner," he said.
The company that Kurt worked with, New York-based Tradeline Masters, says that it's helped tens of thousands of customers improve their credit scores. But as the mortgage meltdown continues, the "piggybacking" strategy employed by Tradeline and other companies has raised concern among law enforcement officials and the lending industry.
Some are taking action to stop the practice: The Florida State Attorney General's Office said it's launched civil investigations to determine whether two Florida-based credit repair companies were violating state law through their piggybacking services.
Meanwhile, Fair Isaac Corp., the credit analysis company that helps determine the scores for the nation's three major credit bureaus, said it's implementing measures to limit the impact that piggybacking has on consumer credit scores.
Piggybacking "is only a ruse to try to deceive the scoring systems and, by extension, lenders," said Craig Watts, a spokesman for the Fair Isaac.
Here's how it works: A consumer seeking to boost his or her credit score seeks the services of a credit repair agency. The agency, for a fee, acts as a matchmaker of sorts, seeking out a credit card holder who has good credit.
Help for Consumers with Poor Credit
The card holder allows the poor-credit consumer to sign on to his or her credit card as an authorized user. In return, the card holder receives hundreds of dollars in compensation and is also assured that the poor-credit consumer will not actually use the card. The poor-credit consumer, meanwhile, sees his credit score increase by 10, 20, 30 points or more, potentially allowing him to qualify for more affordable loans.
Congress first allowed authorized users to build credit histories in the 1970s with the passage of the Equal Credit Opportunity Act. The law targeted women who were authorized users on their husband's credit cards, but didn't have cards of their own.
"It was aimed at helping women establish their own credit rating outside of their husbands," said Gerri Detwiler of Credit.com, a credit information Web site. "That was the law that essentially said creditors have to take into account that information that would show that a spouse has helped manage a credit account."
In the last five years, Detwiler said, credit repair agencies "figured out this was a loophole to help people with bad credit boost their credit scores quickly."
Edwin Mansour, the chief executive officer of Tradeline Masters, said he's been in the business for 10 years. Mansour said he's helped customers boost their scores by as much as 300 points by enabling them to become authorized users on other people's credit cards.
Mansour refers to the people whose credit cards are "rented out" as "credit investors." Some, he said, have earned as much as $5,000 a month by allowing multiple authorized users to sign on to their cards. The customers seeking to boost their credit score, meanwhile, pay several hundred dollars for each card they sign on to.
Mansour conceded that his work depends on a "crack in the system," but said that it's up to lenders to review credit reports and check for authorized users.
And while some credit repair agencies have been accused of swindling customers, Mansour said his business operates legally. His company, he said, has helped people who have faced obstacles in the past.
Second Chance on Credit
"If a person had bad times a few years ago and all of a sudden, thank God, things turned around for them, why shouldn't they get a second or third chance?" Mansour said. "Why not?"
Others see it differently.
In a public case file on its investigation of one Florida company, the Florida Attorney General's Office referred to the "rent of credit" lines as a way to "facilitate potential lending fraud."
Applying for a loan and presenting a credit score that's been inflated by piggybacking is fraud because it means you are misrepresenting your credit history to a lender, said Marc Savitt, president of the National Association of Mortgage Brokers.
"When a loan underwriter reviews a file and makes a determination on that file whether that borrower is creditworthy to receive that loan, they should be looking at that borrower's own credit not credit that they borrowed from someone else," Savitt said. "Especially in this envionrment, we can't be making loans to people without a true depiction of their actual credit."
Lenders rely on borrowers' credit scores to determine the risk they take on when offering them loans, said Fair Isaac's Watts. If someone misrepresents their credit score and later defaults on a loan, "the lender is out a pocketful of money," he said.
That, he said, "then trickles down to the rest of us with higher interest rates overall."
Lenders and brokers aren't the only ones worried about the impact of piggybacking on their businesses. John Brosnan, a foreclosure counselor in Nevada, is suing a California-based company that offers piggybacking services.
He said that at least two of his customers -- who were trying to obtain new loans or refinance existing mortgages -- stopped working with Brosnan and, instead, used the California company to boost their credit scores and get better interest rates on their loan.
Loopholes in Piggybacking
Like other critics, Brosnan said he believes the practice is illegal.
"I lose business because I'm complying with the law," he said.
Watts said that, starting next year, Fair Isaac will implement measures designed to stop people from successfully raising their credit scores through piggybacking. Watts said he couldn't elaborate on how the measures will work because Fair Isaac wants to prevent credit repair agencies from trying to circumvent the new system.
Mansour is confident, however, that Fair Isaac won't be successful and that his business is secure. The firm, he added, had tried to tackle piggybacking in the past and failed.
"It's a system that's been in effect for over 35 years now; now they're going to change the system because of a glitch?" he asked.
"When there's one loophole in the system, there's many others," Mansour said. "They've got to do a lot more patching up to stop me."