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
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.
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
Related Terms
- 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
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!