Tradelines “Piggybacking Credit" & Why It Is Allowed

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Piggybacking is when an individual becomes an authorized user on an account for the sole purpose of improving that person’s credit history.
— Federal Reserve Board, Washington, D.C.

The team here at Splendid Credit are constantly searching for different sources of information to keep our cardholders and potential cardholders informed about the Authorized User Tradeline business. We found a very lengthy document on the Federal Reserve website and filtered through it to break down exactly why adding authorized users is not only legal but encouraged!

“If an authorized user account is added in advance of a major credit transaction, such as a new mortgage, the individual may be able to access credit for which he would not have otherwise qualified or to obtain credit with much lower borrowing costs.”

Lets start from the top

Authorized Users

An “authorized user” on a credit card is a person who is permitted by an account holder to use an account without being legally responsible for any charges. The Federal Reserve’s Regulation B, which implements the 1974 Equal Credit Opportunity Act, requires that information on spousal authorized user accounts be reported to the credit bureaus and considered when lenders evaluate credit history. This was created because of complaints received from women who were unable to obtain credit because information on accounts jointly held with their husbands was reported to the credit bureaus in the husband’s name only. The Board took the view that, since some state laws hold one spouse liable for debts incurred by the other, a spouse should have the “benefit or burden” of the credit history of their spouse’s accounts that they were authorized to use.

“An authorized user never receives the account number nor access to the credit card - so as an account holder your information is never compromised.”

Creditors generally give the credit bureaus information on all authorized user accounts without indicating which authorized users are spouses and which aren’t. In fact credit scoring modelers can’t distinguish spousal from non spousal - requiring that all authorized users receive similar treatment.

Becoming an authorized user on an account with good payment standing, low balance, and an older account can improve an individual’s credit score - potentially increasing access to credit or reducing borrowing costs. In general, an individual's credit record is considered to be “unscoreable” when it lacks sufficient information or when there is no evidence of recent account activity. Typically individuals under 30 have younger tradeline ages for their reported credit. The practices described has the opportunity of creating the “piggybacking” credit to emerge. Piggybacking is when an individual becomes an authorized user on an account for the sole purpose of improving that person’s credit history.

Typically in a “piggybacking” arrangement, an individual pays a fee to be added as an authorized user on an account to basically “rent” the accounts good credit history. This is a great way for people with short credit histories to be able to increase their score. The person added however is an authorized user in name only. The individual added never receives the account number nor access to the credit card - so as an account holder your information is never compromised.  

This is where we step in! We are able to locate account holders who meet the criteria and also who are willing to add said borrowers to their account.

“Over one‐third of individuals have one or more authorized user accounts”

Effects of Authorized User Accounts on Credit Scores

The contribution that the presence of authorized user accounts on an individual’s credit record makes to credit scores and, consequently, access to credit, each of the credit characteristics that comprise the FRB (Federal Board of Revenue) base model was recalculated without the authorized user accounts. A new value for the FRB base score was computed based upon these recalculated credit characteristics. This new value represents the credit score that each individual would have received had their authorized user accounts not been in their credit record. The difference between each individual’s FRB base score and this new value measures how the the authorized user accounts effects each individual’s credit score.

Overall, the data suggest that people with authorized user accounts on their credit records experience a significant score increase. That is of course that the account is in good standing. If the account was in poor standing, the authorized user would experience a negative effect on their credit score.

Besides demographic groups, there may be other subsets of the population that are more likely to be helped or harmed by the presence of authorized user accounts. In particular, the importance to an individual of authorized user accounts in the calculation of a credit score may differ depending upon the contents of an individual’s credit record. Those individuals with fewer non‐authorized user accounts on their file, shorter credit histories, or higher utilization rates on their non‐authorized user tradelines may stand to gain the most from the inclusion of authorized user accounts in the calculation of a credit score.

On the whole, this analysis suggests that the inclusion of authorized user account information in computing an individual’s credit score has a modest effect. Furthermore, this inclusion does not appear to have a disproportionate impact on the members of any particular demographic group. However, there are some subsets of the population (in particular, individuals with very thin or very short credit histories) for whom the inclusion of authorized user accounts has a relatively larger effect on scores. Consistent with our earlier findings about the relative quality of authorized user and non‐authorized user tradelines, score changes from the inclusion of authorized user tradelines are generally positive.

The Effect of Piggybacking Credit on Credit Scores

The contribution that authorized user accounts appear to make, on average, to individual credit scores suggests that the potential change that can be achieved by buying authorized user status on an account is typically very positive. Reason being, authorized user accounts are generally higher quality than non‐authorized user accounts (in that they have lower utilization rates, older ages, and better payment histories) within most groups examined, the pattern of authorized user and non‐ authorized user accounts across groups is similar.

“Authorized user accounts are generally higher quality than non‐authorized user accounts (in that they have lower utilization rates, older ages, and better payment histories)”

For example, both the authorized user and non‐authorized user accounts for young individuals (under age 30) are not as old on average, as the accounts of older individuals. Consequently, the credit increase estimates may underestimate the gains in score that can be achieved from piggybacking on an even higher‐quality account.

The importance of a change in credit score will depend crucially upon both the size of the change and the initial credit score. For example, a 20 point score increase might have a smaller effect for an already prime‐quality borrower (who may already qualify for credit on the most favorable terms) than it would for a subprime borrower, who as a result might now appear to be near‐prime or even prime‐quality.

The practice of piggybacking credit can increase credit scores to a significant extent, if the account to which a borrower is being added is of sufficiently high quality. Furthermore, it appears that a large fraction of borrowers – particularly borrowers with thin or short credit histories – can obtain substantially higher credit scores as a result of this practice.

Conclusion

Regulation B, which implements the Equal Credit Opportunity Act (ECOA), contains many requirements about the treatment of authorized user accounts. Among the requirements are that creditors who report information to credit bureaus must report the information in a manner that reflects the participation of both parties and that information on authorized user accounts must be considered, when available, in a evaluating credit history to assess creditworthiness.

Analysis of authorized user tradelines in a random sample of credit records suggests that over one‐third of individuals have one or more authorized user accounts. The characteristics of authorized user accounts are generally superior to non‐authorized user accounts in that they tend to be older, have lower utilization levels, and less evidence of past delinquency.

“Information on authorized user accounts must be considered, when available, in a evaluating credit history to assess creditworthiness.”

Married women, whose treatment was a central factor motivating the provisions of Reg. B, are more likely to have authorized user accounts on their credit records than are married men. The greater frequency with which married women are authorized users, however, does not appear to come at the expense of being an account holder. The credit records of married women also had the same or slightly more non‐authorized user tradelines than the records of married men. This suggests that the concerns about a lack of credit history for married women as a result of accounts being reported to the credit bureaus in the husband’s name that motivated the Reg. B provisions relating to spousal authorized user accounts may be less relevant today.

Based on the analyses documented in this paper, authorized user accounts appear to provide a boost on average to individual credit scores in a scoring model that incorporates authorized user account information. For those individuals with thin or short credit histories, however, the incorporation of authorized user tradeline information may offer an economically‐meaningful boost to scores.

Despite the small differences in scores as a result of authorized user accounts, our research suggest that the practice Piggybacking credit can have a large effect on the scores of individuals with short or thin credit histories. If an authorized user account is added in advance of a major credit transaction, such as a new mortgage, the individual may be able to access credit for which he would not have otherwise qualified or to obtain credit with much lower borrowing costs.

Source:

Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, 2010-23, “Credit Where None Is Due? Authorized User Account Status and ”Piggybacking Credit” Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C.

What Is A Tradeline?