Definition
Piggybacking in the context of credit scoring refers to a practice wherein an individual with a poor credit history is added as an authorized user to an existing credit account held by another individual with an excellent credit rating. The goal is to transfer the good credit history of the account holder to the authorized user, thereby artificially boosting the credit score of the latter.
Examples
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Family Assistance: Jane, who has a low credit score, is added as an authorized user to her mother’s credit card. Her mother’s credit card has a long history of on-time payments and low credit utilization. As a result, Jane’s credit score improves due to the positive credit history now attributed to her.
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Paid Service: John, with a poor credit score, pays a third-party service to become an authorized user on multiple credit accounts with excellent histories. This is done specifically to enhance his credit score quickly.
Frequently Asked Questions (FAQs)
Is piggybacking on a credit account legal?
The legality of piggybacking can be complex. While it is generally legal to add authorized users to a credit account, the practice raises ethical issues and concerns about misleading lenders. Some financial institutions and credit bureaus have measures in place to recognize and possibly discount such arrangements.
How does piggybacking affect my credit score?
As an authorized user on an account with a good credit history, you may see an improvement in your credit score because the account’s positive history is factored into your credit report.
Can adding an authorized user with poor credit negatively impact my credit score?
Adding an authorized user does not typically affect the primary account holder’s credit score. However, if the authorized user makes transactions on the account that lead to high balances or missed payments, it could negatively affect the primary account holder’s credit.
Are there alternatives to piggybacking to improve a poor credit score?
Yes, there are several alternatives, such as:
- Secured credit cards
- Becoming an authorized user on a family member’s account without commercial arrangements
- Credit-builder loans
- Consistently paying bills on time and reducing debt
- Credit History: A record of an individual’s or company’s past borrowing and repaying behavior.
- Credit Rating: An assessment of an individual’s creditworthiness, typically determined through credit scoring.
- Credit Scoring: A numerical expression based on a level analysis of a person’s credit files, representing the creditworthiness of that individual.
- Underwriting: The process by which a lender or insurer evaluates the risk of insuring or lending to an individual or organization.
Online References
Suggested Books for Further Studies
- Credit Repair Kit For Dummies by Steve Bucci
- Perfect Credit: 7 Steps To A Great Credit Rating by Lynnette Khalfani
- Your Score: An Insider’s Secrets to Understanding, Controlling, and Protecting Your Credit Score by Anthony Davenport and Matthew Rudy
Fundamentals of Piggybacking (Credit Score): Finance Basics Quiz
### What is the primary objective of piggybacking on a credit account?
- [ ] To share credit limits
- [x] To improve credit scores
- [ ] To diversify credit types
- [ ] To reduce interest rates
> **Explanation:** The main goal of piggybacking is to improve the credit score of the person being added as an authorized user by associating them with a positive credit history.
### Who typically benefits from the practice of piggybacking?
- [ ] The primary account holder
- [x] The authorized user
- [ ] The lender
- [ ] All parties equally
> **Explanation:** The authorized user benefits from piggybacking as their credit score receives a boost from the good credit history of the primary account holder.
### Can piggybacking legally be used to improve a credit score?
- [x] Yes, but it has ethical concerns
- [ ] No, it is illegal
- [ ] Yes, without any concerns
- [ ] Yes, but only in certain states
> **Explanation:** While piggybacking is generally legal, it is ethically contentious because it can mislead lenders on the creditworthiness of the authorized user.
### Which scenario best describes piggybacking affecting both parties' credit positively?
- [ ] Both primary and authorized user’s credit scores are impacted equally
- [ ] Only the primary account holder's credit is affected
- [x] Only the authorized user's credit score improves
- [ ] Both scores are negatively impacted
> **Explanation:** Typically, only the authorized user's credit score improves while the primary account holder's credit remains largely unaffected unless negative actions are taken on the account.
### What factor must be positive on the primary account holder’s report for piggybacking to be effective?
- [x] Payment history
- [ ] Credit inquiries
- [ ] Number of accounts
- [ ] Debt-to-income ratio
> **Explanation:** A positive payment history on the primary account holder's report is crucial for piggybacking to effectively improve an authorized user's credit score.
### What is a significant risk for lenders considering piggybacking?
- [ ] Overestimation of credit limits
- [ ] Increased transaction fees
- [x] Misrepresentation of creditworthiness
- [ ] Lower interest revenue
> **Explanation:** Lenders face a significant risk of misrepresentation of the authorized user’s true creditworthiness, which can affect underwriting decisions.
### Which term describes the practice of determining the risk involved in lending?
- [ ] Credit scoring
- [x] Underwriting
- [ ] Credit rating
- [ ] Interest calculation
> **Explanation:** Underwriting is the process of evaluating the risk of insuring or lending to an individual or organization.
### Why might someone seek an alternative to piggybacking to improve their credit score?
- [x] Ethical concerns
- [ ] Lower credit limits
- [ ] Faster approval process
- [ ] Lower interest rates
> **Explanation:** Ethical concerns about misleading lenders often drive individuals to seek more straightforward, legitimate means of improving their credit scores.
### How does being added as an authorized user without using the credit account impact credit?
- [ ] No impact at all
- [x] Still benefits from positive history
- [ ] Negatively impacts score
- [ ] Only impacts after a year
> **Explanation:** Even without actively using the credit account, the authorized user still benefits from the positive credit history associated with the account.
### What is a common, ethical alternative to piggybacking?
- [ ] Predatory lending
- [x] Secured credit cards
- [ ] Payday loans
- [ ] Arbitrage
> **Explanation:** Secured credit cards are a common and ethical alternative for individuals looking to build or rebuild credit without involving another person's credit account.
Above is an overview of the practice of piggybacking in the credit world, along with illustrative quizzes to deepen your understanding. Keep honing your financial knowledge for stronger decision-making in the credit landscape!
