Piggybacking has been a popular but underground part of the credit card industry for decades. It’s allowed consumers with poor credit to “piggyback” and borrow the credit score of someone with excellent credit, effectively allowing them to qualify for loans and credit they would not normally qualify for. Despite the common practice of piggybacking there are still many people that have never heard of it.
So what is piggybacking? The term refers to becoming an authorized user on someone’s credit card to borrow their credit history. The most legitimate form of piggybacking is when parents put their children on their credit cards as authorized users to give them a good start on their credit history. Unfortunately this practice transformed into a service that people are willing to pay for. There are many websites out there offering to let you borrow someone’s credit for a fee–usually over $500. The broker of this transaction and the person with the borrowed credit both receive a portion of the fee. This practice commonly earns the individual with great credit a lot of income because they simply delete the person afterwards and “rent” out their credit card space to someone else. The broker is involved to make sure the person’s credit information isn’t available to the buyer.
Piggybacking has become so popular because having a good credit score means real savings. For example, FICO demonstrates what sort of interest rate you can expect on a $300,000 mortgage depending on your interest rate. If your rate is between 760 and 850 you can expect a rate of 6.274% and a monthly payment of $1,852. People with credit between 580 and 619, on the other hand, are looking at 8.905% and $2,393 monthly.
For years piggybacking has created an unfair playing field in the credit industry. According to Fair Isaac, the developer of FICO, you can’t expect an immediate increase in your score from proper behavior like paying your bills on time. Becoming an authorized user, however, grants you an immediate and significant score increase. Associated Press mentioned one credit borrower that paid $1,800 for three authorized credit slots. Within a month the man’s score had climbed from a very poor 550 to an excellent score of 715.
Thankfully, FICO announced their new FICO 08 scoring system which will eliminate this practice for good. Once lenders and credit bureaus utilize the new system, authorized user accounts will have no effect whatsoever on your credit score. This effect will also be retroactive, meaning anyone’s credit score that has been unfairly inflated will be reverted. While this will negatively affect children who’ve been put on their parents’ credit cards it will benefit the industry overall. According to FICO, they couldn’t find a way around proper use of authorized users due to privacy issues.
All three burueas have now said that they’ll begin using FICO 08 but it will be some time before consumers see a change in their credit rating.