A couple days ago on our sister site WalletPop, forensic accountant Tracy Coenen asked readers for tips on how to help her lower her credit score. Her reasoning? Part of the White House's bailout plan involves freezing the interest rate on adjustable rate mortgages for five years, but only for borrowers who meet certain criteria. One of those criteria is having a FICO score below 660.

Apparently other people are thinking like Tracy. According to MarketWatch:


Should we fault people for trying to game the system? Heck no! That's what systems are for. If multi-billion dollar companies can work out ways to avoid paying any taxes at all, why shouldn't you lower your credit score to save some money on your mortgage?

The fact that the bailout appears so easy to manipulate is really indicative of how stupid it is. Does it make sense to offer a low interest rate only to people with a poor record of paying back loans? Isn't that the exact opposite of the entire point of credit ratings?

Zac Bissonnette is an associate editor with WalletPop, AOL Money & Finance's new personal finance blogsite that covers the financial issues that are important to you in a fun, interesting way.

Shares of Moody's (NYSE: MCO) have plunged as the ratings agencies become Public Enemy No. 1 in the quest for a villain in the subprime fiasco.

Now Forbes is wondering (subscription required) about Fair Isaac (NYSE: FIC), a rating agency for individuals that uses a complex algorithm to calculate a FICO score. As evidenced by the rising foreclosure rates on loans that were given based on people's FICO scores, it seems that the algorithm may not have had as much predictive power as they thought.

According to Forbes, "In January a contrite Fair Isaac, along with bond rating agency DBRS (formerly Dominion Bond Rating Service), produced a study that revealed some of FICO's limitations. It found, for instance, that a borrower with a high credit score is just as likely to default on a no-money-down mortgage as a lower-scoring borrower who puts down 40%. So two portfolios with identical average FICOs can behave very differently."

In other words, the average FICO score of a portfolio of loans is not an accurate predictor of risk -- a huge problem because that's exactly what many investors assumed it was.

Now Fair Isaac seems to be backing off the value of its ratings: According to a vice president at the company, "FICO scores an individual's risk over time. It's not an assessment of the riskiness of the loan made."

If a FICO score can't be used to asses the riskiness of a loan, what good is it in determining whether to lend to someone?

In the wake of the blow-ups of numerous quant funds and scandals involving rating agencies with complex algorithms, it looks like investors would do well to step away from the computer and do some old-fashioned hands-on due diligence.

The practice that involves people "renting" credit history to improve their own credit score will come to an end, according to Fair Issac Corp (NYSE: FIC), the company responsible for FICO credit scores. The change will occur in a new version of its credit score system, the sixth generation, this September.

The move ends the ability for a consumer with poor credit to be placed as an authorized user of another person's credit card, who has great credit. This person would then benefit from having the payment history of the primary cardholder on their own credit report and improve their credit scores.

The practice has grown more common with internet companies popping up offering money to people with good credit to take on those with bad credit as an authorized user, then collecting fees from those consumers for the act.

This is fraud people; plain and simple.

It's hard to believe this practice still exists in the world we live in today. In a nation where state attorney offices and the U.S. attorney's office go after anyone and everyone who looks like they participate in fraud, including UBS Financial Services, Dell Inc. (NASDAQ: DELL) and the one that started it all, the Enron case.

This was considered the "first great scam of the new millennium" by Terry Savage of TheStreet.com. She highlighted that people with poor credit could "borrow" good credit for 60 days and then apply for a mortgage at a lower rate. Maybe that's one of the many reasons why this month's
foreclosure rates rose a whopping 90% year-over-year.

What do you think of this new move from Fair Issac? Do you think this is fair to the people with poor credit? What's your opinion?

The Motley Fool's Dan Caplinger takes a look at the issue of credit piggybacking, and what the industry is looking to do about it. Basically, someone with a low credit score can pay someone with a better score to add them to their accounts as an authorized user, without actually using the account. There are companies that offer this "service" and, needless to say, the credit card companies aren't happy about it because it distorts credit. It allows completely irresponsible people to buy good FICO scores. It's no different than buying SAT scores from someone else to get into a good college.

While it's hard to have too much sympathy for the credit card companies, they have a right to be upset here. Fair Isaac (NYSE: FIC) has simply elected to stop considering authorized users when calculating credit scores, which seems like a logical step.

A crackdown on piggybacking could also lead to the demise of one of the easiest ways for parents to build credit histories for their children: adding them as authorized users. I'd like to see this end as well because the principle is the same. People should not get credit for stuff they had nothing to do with. It also reeks of nepotism, and seems unfair to kids whose parents don't have good credit. Do we really need to give rich kids another advantage? By piggybacking off their parents credit, kids with responsible parents can have great credit scores without ever having a credit card. Kids with less fortunate parents don't have that opportunity, and that's wrong.

There's no intelligent reason that piggybacking on credit should be allowed, and it will probably be stopped soon.

If someone handed me one million dollars and said "Write an interesting, easy to understand book about credit scores and how to improve yours," I would hand the money back and say it cannot be done. Liz Pulliam Weston is probably one of the only people on the planet who is able to that successfully with her book Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future.

As a responsible saver and spender, I figured that I knew enough to get by without reading this book. I was wrong. The credit scoring formula is just that: a formula, with all kinds of idiosyncrasies that may cause your credit score to have little do with how responsible you are. For example, as a young person with little credit history, I thought that I could build my credit up by getting a credit card, using it instead of a debit card, and paying it off in full each month. This is certainly a financially sound thing to do, but there's one problem: Surprisingly, it could impact my credit score.