Some of the commentary in the New York Times article suggests that this is a “flight to quality.”  That term became common place last fall as investors sought to discard toxic mortgage backed securities for safer and lower-yield investments.  Now, some are suggesting that the credit card companies are trying to hedge their bets against credit card delinquencies by increasing their offers for safer loan types.

“Discover has doubled its volume of loan offers from last year to this , and Citibank has sent out seven times as many retail-banking offers.”

It remains to be seen whether this shift from credit cards to other types of loans will be better for the consumer.  Perhaps it is a sign of credit card companies attempting to diversify their marketing ahead of the coming credit card reform from Congress.  Or perhaps it means that consumers have gotten wise to the methods of credit card companies and are unwilling to expand the number of cards in their wallet.  But those might be loft hopes - it may simply mean that credit card issuers are discovering that their earnings are too dependent on credit cards and that they must diversify to keep their shareholders happy.  We will have to wait and see whether these new loans turn as attractive to, and problematic for, consumers as their credit cards.

The American Bankruptcy Institute expects 1.2 million bankruptcy filings this year.  I feel confident that the blame for the increase in bankruptcy filings can be placed firmly on the nation’s increasing credit card and medical debt, declining home prices, and job losses.

Businesses haven’t been immune from the pressures causing individuals to turn to bankruptcy.  The Associated Press found bankruptcy filings by 12 companies with $1 billion or more in assets, more than the prior four years combined.  And the bankruptcy court data showed business bankruptcy filings up 41 percent to 33,822.

One of the sad parts of Forbes’ list of the cities in the United States with the most debt is that the city with the most delinquent credit cards didn’t even make the list of the top ten cities with the most debt problems.  The statistics of these cities are even more staggering than unpaid credit cards:

• Nearly 1 out of 11 homeowners is more than 60 days behind on their mortgage in Laredo, California.
• Home prices have fallen more than 40% in two years in Modesto, California.
• The unemployment rate in California is 7.3 percent, while some cities in Cali have an unemployment rate over 11 percent.

Only a short while ago, this would have been a list of the fastest growing cities with the best real estate home price growth.  Now, it is the list of Forbes’ Debt Capitals of the United States:

10. Visalia, California
9.  Miami, Florida
8.  Las Vegas, Nevada
7.  Yuba City, California (12.2% unemployment)
6.  Fresno, California
5.  Bakersfield, California
4.  Modesto, California
3.  Stockton, California ( 1 out of every 30 homes foreclosed on in 2007)
2.  Merced, California (12.1% unemployment)
1.  Laredo, Texas (second fastest growing city in the nation behind Las Vegas in the 2000 census)

You could be in Spain, where Spanish debt collectors come after you in their top hats and tails.  The goal is to attract more attention to the debtor, and the Spanish company claims they are successful at collecting 70% of the debts.  The article discusses how copycats have sprung up in Spain - debt collectors are now running around dressed as clowns, monks, and Zorro trying to collect debts.  One company even started calling wedding guests asking for them to pay their fair share when the bride and groom didn’t pay a debt from their wedding.

I’m sure that there are plenty of stories about debt collectors in the United States who have crossed the line, but I’m hopeful that they haven’t showed up on anyone’s doorstep in a clown costume asking for payment on a debt.

Delaware is the state of incorporation for most large corporations in the United States because of the perception (whether real or not is a completely separate question) that it has business friendly laws and a good climate for corporate governance.  And after many years of representing the interests of Delaware and its constituents, Biden can’t claim to be as free from corporate influence and Washington lobbyists as I’m sure Obama would like.  One of Biden’s largest political contributors was the world’s largest independent credit card issuer, MBNA, until it merged with Bank of America in 2005.

Among Senator Biden’s most noticeable departures from the agenda of Democrats during his time in Congress was his vigorous support of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  While it has been clear from media coverage that Biden was chosen for his foreign policy credentials (he’s the chairman of the Senate Foreign Relations Committee) and his political experience, one has to wonder why Senator Obama was willing to compromise measures to protect consumers in these troubled times by tying himself to a Vice Presidential Candidate with credit card company ties.

Prior to selection of Biden, Obama had put credit card reform and bankruptcy reform on his platform.  He also went so far as to blast McCain for his support of the 2005 bankruptcy legislation.  His choice of Biden suggests that credit cards and bankruptcy aren’t nearly as high on Sen. Obama’s agenda for President as he might like the American public to believe.  Biden, after all, supported the same bankruptcy legislation that he criticized Senator McCain for supporting, and has financed his election campaigns with the money paid from consumers to credit card companies.

It is, of course, possible that Biden was forced to yield to the wishes of his corporate constituents on the bankruptcy legislation in order to represent his state and might have voted different had he not had to represent their interests.  But given Biden’s previous presidential campaigns and the possibility of using the office of the Vice President as a stepping stone to the Oval Office in 2016, it seems unlikely that he would alienate this well financed constituency by taking up the public’s cause in the battle over credit card reform in Congress and the Federal Reserve.

This is the dilemma that Obama has introduced to the Americans who commented on (presumably in favor of) the Federal Reserve’s credit card reforms.  Of course, the alternative is to vote for the Republican Presidential Nominee, John McCain, who owes vast sums to credit card companies (I recently saw a story that he and his wife owe American Express over $1 million), doesn’t use the internet, and can’t tell you how many houses he owns without asking a staffer.

Well, it turns out that increasing their use of the right of offset isn’t the only way that banks are stepping up their efforts to collect from those in credit card debt during this time of increasing debt and past due accounts.  Wells Fargo has taken a different tactic - it is sending letters to customers it believes are at risk of defaulting on their debt with offers of repayment plans and consumer credit counseling.  The San Francisco Business Times reported that the letter says, in part, “Wells Fargo strives to meet the financial needs of our customers, and intends to work with customers through both prosperous and challenging times.”

The effectiveness of the tactic is in doubt in my mind.  First, I expect that many individuals will throw the letter away thinking that it is junk mail.  Second, credit card debt in America is a taboo subject. Even if the debtor realizes that they are in trouble financially, I expect that the culture of silence surrounding debt will prevail over the offer to talk through the recipient’s credit problems with their debt holder.  The evidence in support of this point can be found in the housing market - there have been multiple offers by government and mortgage companies to assist subprime mortgage holders before they lose their home to foreclosure and yet foreclosures are increasing in the United States.  Moreover, I don’t think that Americans trust credit card companies, and by extension the bank holding their debt, enough to believe that their offer is genuine.  A recent article by the Associated Press cited a survey which found that 58% of Americans don’t trust credit card companies.  And debt collectors certainly haven’t done creditors any favors with their debt collection tactics.

I wonder just how far Wells Fargo is willing to go to help its customers.  Offers of credit counseling and payment plans seem like a relatively insignificant gesture.  Will Wells Fargo go so far as to negotiate the amount of debt and interest rate down in order to make payments easier if its debtors are in trouble?  Banks and mortgage companies have said that they are willing to help those having difficulty making their house payments, but the bureaucracy behind securing approval for a short sale that I have heard about anecdotally would suggest that the truth in practice is quite different.  If Wells Fargo were truly concerned about the financial health of its banking customers, I expect that it would have suggested more drastic measures that would both benefit consumers and increase the likelihood of debt repayment.

The San Francisco Business Times speculated that Wells Fargo might be using card balances, credit limits, and credit scores to determine which accounts to send the letter to. Just two paragraphs later, the article talks about a prior statement that Wells Fargo knows the income of its card holders flowing through their checking accounts.  It turns out that many holders of Wells Fargo credit cards also have bank accounts with Wells Fargo.  I wonder why the San Francisco Business Times did not suggest that Wells Fargo might be looking at the checking account balances and income of its customers in order to determine who is at risk of default?  My mind is running rampant with privacy concerns about this potential practice.

Wells Fargo isn’t the only bank that’s trying to collect on its problematic accounts.  The Houston Chronicle, in an article that has since disappeared into the depths of the internet, took note of a more traditional method for debt holders to collect debt owed to them that is increasing - lawsuits.  One lawyer representing consumers said that there were 10 times more lawsuits filed in Dallas, Texas, over consumer credit card debt than three years ago.  As courts find ways to streamline the legal process for smaller consumer debts and debtors don’t find the same protection in the bankruptcy laws that they once did,  debt holders are finding that the potential financial reward from a judgment compared to the costs of bringing a lawsuit weighs in favor of litigation.

One factor that may be driving the increased litigation is the likelihood that the debtor will not retain an attorney to protect their interests.  A recent Wall Street Journal article noted that the cost of hiring an attorney for a Chapter 7 bankruptcy filing averages about $1,000 - a pretty large chunk of change for those without sufficient money to pay their creditors. Representation by a lawyer for a Chapter 13 bankruptcy averages about $3,000.

Despite the potentially high cost, a brief look around the country indicates that bankruptcies are up a substantial amount.  Bankruptcy filings are up 31% in New York in the first seven months of 2008, according to the NY Daily News. San Jose, California, has seen a 70% increase in the number of bankruptcy filings over the past year, according to the San Jose Mercury News.  While some might blame the increase in filings on the irrational exuberance of the nation’s youth taking on credit card debt, it’s seniors who have been hit particularly hard in current times, composing approximately 22 percent of bankruptcy filings, according to the Corporate Dispatch.

How are corporations faring in these economic times?  It’s a safe assumption that corporate bankruptcies haven’t increased at quite the pace that law firms would have expected - as the Wall Street Journal recently profiled them as waiting for work   - though there have been some high profile bankruptcies recently - Steve & Barry’s, Bennigan’s, and Mervyn’s to name a few.

Prior to its 2007 decision to prevent credit card piggybacking, families added spouses and children to credit cards as authorized users to permit them to use the credit card for purchases as well as build a positive credit history and boost their credit scores when they may not otherwise be able to qualify for credit at that interest rate. An authorized user is permitted to use the credit card but is not responsible for any money charged to the account (including their own purchases). More than 50 million people are authorized users on another individual’s credit card.

For those with a poor or unestablished credit history, or a bad credit score, it allowed them to borrow and use the credit of another through the requirement that the account holder take responsibility for repayment of the debt owed on the account.

Why did Fair Isaac make the change to remove the effect?

During 2006-2007, several websites and credit repair agencies offered those with bad credit the ability to artificially inflate their credit score by renting the good credit of an anonymous individual. The individual with poor credit paid the credit repair company which then paid a portion to the individual with a good credit score and credit history. Credit repair firms were charging thousands of dollars for this sort of quick fix. The concern was that individuals were artificially (and perhaps fraudulently) inflating their weak credit rating and causing lenders to take on a risk of default on the debt that they were not properly compensated for.

Why reconsider the decision and allow authorized user accounts to impact credit scores?

• The Equal Credit Opportunity Act requires that lenders consider the credit history of accounts which both spouses are permitted to use when they assess a spouse’s credit risk. If the FICO score did not consider authorized user accounts, lenders would have to find another way to meet this requirement.

• Critics objected to the removal of authorized user accounts from credit score considerations because it would leave up to 3 million people without sufficient credit history to generate a credit score, and others would be subject to a lower credit score, increasing the cost of their borrowing.

• Fair Isaac obviously felt that the new calculation method for the FICO credit score sufficiently protected lenders from abuse and eliminated the credit repair quick fix that authorized user accounts offered.

When will the change take effect?

The press release by Fair Isaac says the change is expected to take several weeks and will be implemented as soon as possible. But a Bankrate article notes that it could be a long wait.

Is piggybacking legal?

There has been vigorous debate over whether artificially inflating credit histories through illegitimate authorized users (non-spouse, non-children) is legal. I’m not going to provide any legal advice - you should consult your attorney.

How much could you get for renting your credit history?

From numbers that I have seen on the internet from prior to the 2007 decision to remove the effect, credit repair providers were paying between $200 and $700 per account, about 25% of the amount paid by the debtor for credit repair. More money was paid for seasoned tradelines with high credit limits compared to newer accounts with smaller credit lines.

What companies are involved in credit score piggybacking, which is also known as renting a credit score or adding a tradeline?

I found a few companies offering this service via Google, but many of the providers that I saw mentioned in 2006-2007 news articles no longer offered this service on their website, had a non-functioning website, or had not yet updated their website to reflect the recent change in the scoring model.

Are any of these credit repair companies reputable?

No idea. EXTREME CAUTION is warranted.

How much could the credit score of the authorized user increase?

An anecdotal story used by Bankrate in a 2007 article stated that the individual had a 65 point increase. Of course, only the history of the account that one is an authorized user for is considered in the authorized user’s credit score, and every account is different. The other accounts of the primary account holder do not pass any benefit or detriment - so it’s impossible to draw conclusions from the credit score of the account holder.

Some have warned that authorized user accounts are not a cure all since they aren’t in and of themselves a major factor in your credit score. Additionally, any effect now may be less because it may be that Fair Isaac has downgraded the effect of authorized user accounts on credit scores.

What kind of savings can a higher credit score yield for an individual?

The number that I have previously seen is that a 30 point increase in your credit score can decrease interest paid over a year by $105. Of course, over the life of a mortgage, small changes in interest rates can add up to big savings.

What should the account holder who is considering an authorized user know?

You are solely and completely responsible for the actions and debt of the authorized user to the credit card issuer as if you had incurred the debt yourself. High balances on the credit card could also impact the assessment of the primary accountholder’s credit availability.

If you are considering signing up to rent your credit score, among other things, you should consider the reputation of the service, potential identity theft problems, and whether you are protected from the user running up charges on your account.

Any downside for the authorized user?

Both good and bad credit history can flow to the credit report of the authorized user. If the account goes into default or collection, that information will be reflected in the authorized users credit score. But the individual can ask to be removed as an authorized user and have the information removed from their credit history. Of course, that will take time, and if you were renting the credit history and did not know the credit information, it’s unclear exactly how this would be accomplished - though I’m sure a system could be put in place.

If you are considering paying a credit repair firm for a quick fix, you’ll have to weigh, among other things, the cost, the potential that the credit score piggybacking won’t have the desired effect, and the reputation of the credit repair agency.

Will credit repair agencies return to credit piggybacking?

That’s anyone’s guess. Since there is alot of money in fixing bad credit scores, the answer is probably yes. It seems likely they’ll test the system and figure out if they can get around the FICO credit score safeguards.

What would the FICO model likely look for in order to differentiate legitimate authorized users from intentional tampering?

These are just speculative, but I would guess they would examine these four characteristics:

• Family Relationship - Of course, in a Bankrate article, the writer posed the question of whether users could game their credit score through an authorized user account on the credit card of a family member with a good history and the answer was no.

• Geographic Proximity - One way to determine whether authorized users are strangers.

• Use of Credit Line by Authorized User - Credit repair occurred anonymously and did not provide for the user to use the account holder’s credit line.

• Multiple Authorized Users - If you’ve authorized more than one non-family member, that may be considered evidence of credit score piggybacking.

Two other considerations worthy of note for those considering it:

• Decreased Impact on Credit Scores - Fair Isaac may have downgraded the impact of authorized user accounts in order to discourage credit score piggybacking providers.

• Opt Out - Fair Isaac may allow lenders to see the credit rating without the impact of the authorized user accounts.

DISCLAIMER. This is NOT legal advice and is NOT a recommendation that you engage in this activity. Use at your own risk.

More Reading:

Recent News Articles:

• USA Today - Authorized-user credit card plans can be useful, and abused
• Hartford Courant - ‘Authorized Users’ Back in FICO Score
• Bankrate - Authorized-user accounts OK again
• Baltimore Sun - Thumbs up for FICO revision

Recent Blog Discussions:

• Lenderama - FICO to Restore Authorized User Accounts
• Mrs. Micah - Finance for a Freelance Life - Now Being an Authorized User WILL Get You Credit Scores Again
• Choice Finance - FICO score changes in 2008
• Yielding Wealth - FICO Backtracks on “Authorized User”

Older News Articles:

• Bankrate - Dangers of being an authorized user
• Marketwatch - No Free FICO Rides
• Chicago Tribune - Credit-boosting shortcut fades fast
• Washington Post - Reprieve for the Piggybackers
• Washington Post - Piggybackers Take You for a Ride
• Bankrate - Piggyback can lift your credit score

Older Blog Discussions:

• Phoenix Real Estate Guy - Buying a Higher FICO Score?!?
• My Money Blog - Got Good Credit? Rent It Out For Cash!
• Work at Home Business Opportunities Weblog - Rent Your Credit Rating?

Australians owe a national record $44.2 billion in credit card debt, up 3.5% since December.  The average credit card debt for a family in Australia is $3200, with typical interest rates ~ 20%.

Credit card spending in Korea in July was up 22 percent compared to July 2007, due to both an increase in the popularity of credit cards and a 6 percent year over year increase in consumer prices.

And Turkey’s problems with credit card debt were recently chronicled by the New York Times.  As the NY Times said, ” Few American exports have proved as popular as credit cards.”

I wonder if consumers who believe that they have been unfairly denied access to lower interest rate credit cards and debt could sue under a similar theory?

Credit raters have been the subject of investigation and litigation concerning their role in the subprime crisis.  I think it is pretty universally accepted that they dropped the ball on their rating of mortgage backed securities.  But the question of whether they can be held liable for their credit ratings is an entirely different question which will probably be extensively litigated in the years to come.  If corporate plaintiffs are successful in holding a credit rating agency liable for a high rating upon which they relied, consumers may get the ammunition that they need for unwarranted low marks.  However, credit raters could argue that there is a substantial difference between debt buyers and credit seekers.

That’s what makes the Connecticut lawsuit interesting.  Connecticut is essentially a consumer in these transactions, and a beneficial ruling could aid consumers seeking to challenge the cost of their low credit score.  While it might not make sense for an individual consumer to bring a lawsuit, the cost of an artificially low credit score across a large group (say 30 points low) could raise the cost of carrying debt by billions.  If you could boost your credit score by 30 points, you would save an average of $105 a year - and if all Americans were to boost their credit score by 30 points, Americans would save $28 billion collectively.