Piggybacking (Credit Score): Understanding the Financial Scheme

August 25, 2024 4 min read Finance Credit Management Credit Score Financial Schemes Credit History Credit Scoring Underwriting

An in-depth look at the practice of piggybacking credit scores, its implications, legality, and impact on credit scoring.

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Piggybacking, in the context of credit scores, is a financial scheme where an individual with a poor credit history is added as an authorized user to another individual’s credit account, who holds an excellent credit rating. This maneuver aims to transfer the good credit history of the primary account holder to the authorized user, thereby enhancing the credit score of the latter. Although the practice can appear beneficial for the person with poor credit, it raises ethical and legal concerns and can be seen as deceptive to lenders who rely on credit scoring for underwriting loans.

Mechanism of Piggybacking

How Piggybacking Works

Agreement: An agreement is made between two parties: one with excellent credit (primary account holder) and one with poor credit (authorized user).
Adding Authorized User: The primary account holder adds the individual with poor credit as an authorized user on their credit account.
Credit History Transfer: The credit history of the account, including on-time payments and credit utilization, is reported to credit bureaus, which may then reflect on the authorized user’s credit report.
Impact on Credit Score: The positive credit history can improve the authorized user’s credit score, making it easier for them to obtain loans or credit.

Legal and Ethical Considerations

Legality: The legality of piggybacking varies by jurisdiction and the specific practices involved. Some forms of piggybacking, such as when friends or family members help each other, may be legal, while paid piggybacking services fall into a legal gray area and can be considered fraudulent.
Ethics: Piggybacking raises ethical questions as it involves misleading lenders about the creditworthiness of an individual. It can be considered a form of fraud because it artificially inflates a person’s credit score without a genuine improvement in their financial behavior.

Implications for Stakeholders

For Lenders

Lenders rely on credit scores to assess the risk of lending money. Piggybacking can result in:

Inaccurate Risk Assessment: Lenders may extend credit based on a skewed perception of the borrower’s creditworthiness.
Increased Default Risk: Borrowers who have not earned their high credit score through financial discipline may be more likely to default on loans.

For Borrowers

Borrowers using piggybacking may see:

Temporary Boost: An improved credit score can temporarily enhance access to credit.
Potential Risks: If discovered, the practice can lead to penalties, account closure, or more severe legal consequences.

Historical Context

Piggybacking emerged as a credit repair strategy as credit scoring systems became more integral to financial institutions. While originally an informal practice among acquaintances, the advent of online platforms has led to the commercialization of piggybacking, prompting regulatory scrutiny and debate about its legitimacy.

Examples and Case Studies

Example 1: Individual A with a 780 credit score allows Individual B (with a 600 score) to be an authorized user on their credit card. Individual B’s score increases to 700, enabling them to secure a car loan.
Case Study: Financial institutions in the early 2000s reported a surge in piggybacking services online, leading to credit bureaus modifying how authorized user accounts affected credit scores.

Credit History: A record of a borrower’s repayment of debts.
Credit Rating: An evaluation of the credit risk of a prospective debtor.
Credit Scoring: The process of assigning numerical values to credit information to predict the likelihood of repayment.
Underwriting: The process by which lenders evaluate the risk of lending.
FICO Score: A specific credit score model used by lenders.

FAQs

Is Piggybacking Legal?

The legality depends on the jurisdiction and whether the practice involves payment. Consult local laws to understand specific regulations.

Does Piggybacking Always Improve Credit Scores?

Not always. Credit bureaus have methods to detect and adjust for piggybacking, limiting its effectiveness in some cases.

Are There Alternatives to Piggybacking?

Yes, alternatives include secured credit cards, credit builder loans, and consistent on-time payment of bills.

References

Fair Isaac Corporation (FICO): Information on how authorized user accounts affect credit scores.
Federal Trade Commission (FTC): Guidelines and warnings about credit repair schemes and piggybacking.
Consumer Financial Protection Bureau (CFPB): Resources on credit scores and advice for improving credit health.

Summary

Piggybacking is a contested practice in the financial world, offering a temporary benefit to individuals with poor credit at the potential cost of misleading lenders. Understanding its mechanisms, implications, and legal considerations is crucial for both borrowers and lenders. While it can provide short-term gains in credit scores, it comes with significant ethical and legal risks. Exploring legitimate ways to improve credit remains the most sustainable approach for long-term financial health.