A good credit score can save a real estate investor thousands of dollars in interest payments over the course of a mortgage loan. And a poor credit score can block financing at the outset. So how does one with a low credit score get it up, so to speak. Well, there are what I’d call legitimate ways to improve your credit score. And then there’s what we are going to talk about today–piggyback credit histories to improve your credit score. I should say that I’m not recommending this approach; I’m simply reporting on what’s going on in the world of credit scores. (But to be safe, don’t mention this article to Mike because he’s a tad legalistic if you know what I mean.)
Here’s how it works.
Renting Credit Histories
Various online companies pay holders of high limit credit cards to allow the company to add authorized users to the card. These authorized users don’t have access to the credit card itself and can never actually charge anything to the account. Individuals with low credit scores then pay these online companies a fee (often $1,000 or more) to be added to the card. The companies claim that within 90 days, and often within weeks, the individual’s credit score will increase significantly.
In one widely reported case, Alipio Estruch, a 37-year-old real-estate agent, paid $1,800 for three credit card slots that helped boost his score from 550 to 715 in about a month, allowing him to secure a mortgage at a favorable rate.
Enter FICO 08.
FICO 08
The credit reporting agencies and mortgage companies didn’t much care for the practice of renting credit histories, as you might imagine. As a result, last summer Fair Isaac who established the FICO credit score introduced FICO 08. FICO 08 excludes from an individual’s credit history any accounts on which the individual was an authorized user. The problem is that in many cases, individuals are authorized users of credit in perfectly appropriate circumstances. For example, when a parent adds their college aged child as an authorized user of a credit card, it will improve the child’s credit score. Under FICO 08, even these legitimate authorized users would be penalized.
So far, the three major credit reporting agencies have yet to adopt FICO 08. Interestingly, their own credit score formula, called Vantage, accomplishes the same thing as FICO 08. To add to the fun, the sellers of credit histories are claiming that FICO 08 violates the Equal Credit Opportunity Act, to which I can only say–Is this a great country, or what?
At this time, the mortgage industry has yet to embrace either. For now, they’re still using FICO (perhaps we can call it “FICO classic”).
Reader Question: Have you (or would you) piggyback credit histories to improve your credit?
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It’s plain and simple fraudulent activity. Credit scores are essentially a measure of past behavior, yes? Piggybacking another person’s score is like using their identity for a background check. You might be a thief, but the jewelry store won’t know because you’re using Mike’s identity (bad Rob!).
I think it was almost dumb for this ever to be allowed in the first place. Though I could see raising responsible kids, putting them on your account, helping them get decent credit, and then setting them free. But even then there are other options.
Most credit repair companies appear to be using fraudulent practices of some kind or another (disputing legitimate claims, piggybacking…).
As much as I dislike the FICO score altogether, this practice makes it even MORE useless. They’re no longer even basing their decisions on YOUR FICO score, but the score you just bought. What’s the point?
Might as well just flip a coin to see whether they’ll pay back the loan or not.
FUCO (oops, I mean FICO)is mean’t to measure an individual’s history, payment patterns and likelihood of repayment. Even your kids shouldn’t be able to use your score, as it invalidates the whole horrid process.
Is this practice legal? Do the people who are “piggybacked” know that it’s happening?
Very bizarre.
My credit is pretty good but I can certainly see if it wasn’t any good and there was a legal loophole where someone might want to take advantage of it.
Mike
These are some great comments, and particularly given that this is a Rob article, I say let the fur fly!
But one thing about this discussion strikes me as particularly intriguing. The FICO score and even the credit bureaus hold tremendous sway that I’ve always found objectionable in general, as I’m sure many others, like Randall, do. So why not “game” the system?
Now I have never used any “shortcut” method to improve a credit score, and I’m pretty sure Rob hasn’t either (although Mrs. Micah’s comment has got me wondering what she knows that I don’t). But if I were to use this “piggybacking” method, have I lied to anyone? First, I haven’t told Fair Isaac or the credit bureaus anything. Now, I’m dealing with a lender, but the lender will use whatever criteria, FICO or other, in their underwriting process, without asking me about whether my FICO score is “real.” And, under the heading of full disclosure, consider this: If I messed up and missed a mortgage payment, but my mortgage lender, deciding to give me a break, didn’t report it to the credit bureaus, would I have an obligation to get Fair Isaac, the big three, or even my new lender on the phone to set the record straight?
But just to be clear, I’m with Rob on his intro–this ain’t no recommendation. Great comments!!
I’m gonna totally ignore the question and blather on about something slightly related…
We don’t use credit ’scores’ to qualify or disqualify applicants because we’ve found they’re generally meaningless. I use the report and go over it line by line, looking for patterns.
For example– our last applicant had a score in the lower 500’s. He had almost no debt, paid everything on time every single month. The only thing we could see dragging down his score were about 5 medical bills (total less than 1000K) that were in collection from a dispute with the hospital.
My best tenant at the moment had a score of 440. They’ve paid on time, every month and keep the house spotless. Their story? The newly married husband went out of town to work contract and left the wife with a set of credit cards. She charged them to the limit without paying a dime the entire time he was gone (about a year.) On his return, he had a heart attack (figuratively) then paid everything off with cash and started over.
The system stinks– we have a great score because we know how it works and we work it to our advantage (minus the piggybacking.) Alot of these folks don’t have a clue and they’re being eaten alive with higher interest rates that amount to ursury.
It’s just not right.
I’m all for piggybacking. If it’s not illegal and it enables me to save money on financial products, then what’s the problem. Granted, I’d be a fool to pay $1000 for the privilege, but if I could save $2000 on the mortgage then I’m game.
And for all the credit card companies that I deal with, not only have I never done this, but I never will. My credit score is strictly of my own making with not an authorised user component in sight.
In regards to your question: this should be fraudulent activity, regardless of whether it legally is yet or not. I have heard of this practice before, and shook my head at it.
A credit score, as currently calculated, is pretty useless in my opinion. For those of us who don’t do debt, the current system says we have either a very low score or even no score at all. A person who owes just about everyone except your brother will have a high credit score. Yet who is in a better position to pay?
Would I ever do such a thing? Not in this lifetime! I personally think the down payment on a piece of real estate should determine the interest rate. Who is more likely to walk away? The zero-down buyer, or someone who has put up at least 20% of the purchase price up front?
I look forward to the day lenders return to sane criteria for mortgages: a down payment, and a reasonable debt to income ratio, being the major points of consideration … not some number generated by a third party that really has no relevance to a person’s *ability* and *willingness* to pay.
Think of how much money for debt reduction I could generate by selling the authorized user slots on my credit cards….
(I have a credit score last reported in the low 800’s)
Not that I ever have. But it is an intriguing idea.
I’d buy one PT, I have no credit at all.
I wouldn’t recommend piggybacking off someone else’s credit or allowing allowing others to piggybakc off yours. I haven’t thought through all of the risks yet, but this must be tracable, which will eventually catch up to both parties involved.
What amazes me is that companies that facilitate this practice are actually arguing that FICO’s attempts to stop it are violating federal law. And it makes me wonder just how trustworthy FICO scores are in the P2P lending markets of Prosper and Lending Club. That being said, the thought of making thousands of dollars a month for doing nothing is tempting. Maybe I’ll rent out Mike’s credit history first to see what happens.
Unfortunately the people that will be harmed in this are spouses who don’t have any cards in their name, but were always authorized users. Take a couple with a 30 year history all in the husbands name. The wife was a legitimate authorized user and shared in the 30 year history. Eliminating those accounts from hers could very well drop her score; she can’t go back and get open an account.
I have been checking out many different companies that do credit scores and credit watch. I will tell you this it dont matter I have a good score with one company and a lower with another no one is the same and this is with six different ones I have never paid late but for years I never used credit and because of this my scores go from 580 to 611 depending on what company I pull my score from and even when I went to get a car loan they got scores that I had not even seen yet so whats the point of having a report in the first place. I have called many of these companies and asked why and they say they all use company software so no one uses the same I like the guys idea of who is best able to pay the one with no credit or the one with all the credit.
Legitimate piggybacking makes total sense when used appropriately. My mother is going to end up having to cosign for my first property as she did for my first car, and always has to help me with large purchases anyway but by adding me to her long standing accounts, I will be able to qualify for things faster than I would by trying to build my own credit from scratch, like dental services not covered by insurance, for example. She keeps the card in her purse and sooner than later, I wont need any help at all.
It is unfortunate commercial companies exploit this practice.
This is a really interesting topic. I am currently exploring the option of piggybacking. Yeah, I said it, I AM CURRENTLY EXPLORING THE OPTION OF PIGGYBACKING. Why? Because I’m sick and damn tired of being rejected left and right by creditors. Its funny to see those who claim that they wouldn’t do it. Of course you wouldn’t! Why would you need to? Either “mommy” or “daddy” is able to co-sign on your things. Guess what? Everybody’s mommy and daddy can’t do the same. HELL, Majority are struggling right along with you! They did a survey of who was the “borrower” and who was the “lender”…guess what? MAJORITY of borrowers were MINORITIES. And well, what would you know…MAJORITY of lenders….THE MAJORITY–meaning of European decent bka Caucasian. Unfortunately, not all minority households had it like the Huxtables. OR if that is seeming too…biased. How about this, be a stay at home mom. Never getting the opportunity to work. We all know that you get credit for good work history. PLUS job=money…banks like to know when you’ve got money. : )… I babbling and I know it. My point is, don’t be quick to say what you will and will not do. Its hard out here and at the end of the day, everybody is just wanting a piece of that American pie. This is the B.S. we are told to strive to get. So why act an ass when an opportunity arrives to bring someone closer to their slice? Sounds like a bunch of haters…..