Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.
Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cellphone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.
The result was a happy ending for Estruch, but the growing practice is sending shivers through the mortgage industry. Federal regulators are also reviewing the practice.
And after being contacted by the Associated Press for this story, Fair Isaac Corp., the developer of the widely used FICO score, said it would change its credit scoring system later this year in a way it said would end this little-known but potentially high-impact mortgage loan loophole.
Instantcreditbuilders.com, or ICB, helped Estruch boost his score by arranging for him to be added as an authorized user on several credit cards of people with stellar credit who were paid to allow someone to ride on their coattails. Parents also use this practice when they add their children to their credit cards to help them build solid credit.
The pitch to those who are essentially renting out their credit history for pay is seductive: You don't need to worry about users of this service receiving duplicate copies of your credit cards, account numbers or any of your personal information. It's essentially free money, they are told.
Brian Kinney, 44, a retired Army officer in Glendale, pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories. Kinney, whose FICO score is above 800 on the scale of 300 to 850, quit his Farmers Insurance Group job and uses the ICB income to tide him over until he starts his own insurance company.
Lenders are worried, however, that they're taking on greater default risks by unknowingly offering lower interest rates than they otherwise would to applicants who artificially boost their credit scores.
Their trade group has complained to the Federal Trade Commission and is talking with the credit reporting bureaus in case the practice becomes more widespread.
Estruch paid $1,800 in December for three credit card spots, and by January his FICO score had jumped from 550 to 715. In mid-March, he closed on his four-bedroom house after obtaining a 30-year fixed-rate mortgage from a unit of American Home Mortgage Investment Corp. It carried a 7.5% interest rate and required no down payment.
"Everything now is score driven," said Estruch, who also works as a mortgage broker. "I had a great mortgage history, but I got hurt because of my credit score." Estruch had bought and sold two houses previously and currently owns another home in New York. He says he's current on his mortgage payments.
Companies such as Largo, Fla.-based ICB are sprouting on the Internet with little overhead and no-frills marketing. They post ads on community websites such as Craigslist and have sponsored links on Google and Yahoo. Competitors of ICB have even reached out to mortgage brokers, lenders and real estate agents, flooding their e-mail with advertisements.
Jason LaBossiere, who founded ICB 1 1/2 years ago, said his company received 100 to 150 new leads daily -- a number that has been growing -- and those inquiries led to 10 to 20 new clients a week.
ICB charges $900 for the first credit card account, with a discount for additional ones. The cardholder allowing the piggybacking on his or her credit history can receive $100 to $150 per slot, depending on the age and credit limit of each card. ICB pockets the rest.
The effect on a credit score depends on what else is in a client's report. But one borrowed credit card account can increase a score 30 to 45 points; two, 60 to 90 points; and five, from 150 to 205 points, according to ICB.
That's because the computer program that calculates scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps lift the credit score.
Once the credit card company files an updated report to credit bureaus -- leading to a higher FICO score -- the credit renter is removed from the account of the person allowing the piggybacking.
However, the credit card's history remains on the authorized user's credit report forever, and lenders have no way of knowing how the credit borrower is related to the cardholder.
A higher credit score can save a person an enormous amount of money because it usually means a lower mortgage interest rate. It also can mean the difference between qualifying for a loan or not, as in Estruch's case.
Fair Isaac said lenders would probably demand about a 9.8% interest rate on a $300,000, 30-year fixed mortgage for an applicant with a credit score of 500 to 579. That would translate into a $2,585 monthly payment for principal and interest.
But a borrower with a score of 760 to 850 seeking the same loan would qualify for about a 6% rate that would cost just $1,796 a month for principal and interest.
Ginny Ferguson, a mortgage broker in Pleasanton, Calif., said: "These companies are encouraging consumers to commit fraud."
Kinney said he didn't know when the practice would be halted but added, "I'm not counting on this for the long term."