Credit Card Piggybacking can raise your scores
Credit card “piggybacking” isn’t a new practice. For years, parents have done it to help their children get a jump start on their credit. However, it recently came under scrutiny because shady credit repair companies and unscrupulous consumers used the practice to artificially boost bad credit scores.
What is Credit Card Piggybacking? Credit card piggybacking is much like the childhood game of being carried around on someone else’s back; but instead, you’re “carried” on someone else’s credit card account. Once you’re added as either a joint card holder or an authorized user to a credit card account, the entire credit history typically appears on your credit report and included in your credit score.
Being a joint card holder or an authorized user on an account with a positive payment history would boost your score. While late payments and high credit card balances could lower your score depending on the other information on your credit report. Note that not all credit card companies report authorized user accounts to credit bureaus, partly because of the cost and partly because of the way the practice has been abused by some.
Piggybacking Abuse. Piggybacking became a way for people with bad credit to artificially raise their credit scores. Some companies mentioned above would enroll you into their program, and for a fee, you could be added as an authorized user to someone else’s positive credit card account and see a boost in your credit score. Then, you could use the higher score to qualify for the good stuff: loans, credit cards, and interest rates you wouldn’t have been able to get otherwise.When the mortgage meltdown began, lenders realized they’d been defrauded and criticized the practice. Fair Isaac, developer of the widely-used FICO score, threatened to remove authorized user accounts from the credit scoring calculation, but instead tweaked the score to allow lenders to better predict fraudulent authorized user accounts. Had the initial plan to remove authorized user accounts been carried out, innocent consumers – which are the vast majority who use this practice (joint account holders, authorized users) – would have seen drops in their credit scores.
Joint Account Holders. When two people have a joint credit card account, both people can make charges to the credit card and the card’s history is included on both people’s credit report. Both people are also liable for the credit card payments. If the payments become delinquent, the credit card issuer can go after either cardholder for payment. There are advantages of Joint Credit Cards. Share a bill. When you and the other person have one rent, electricity or cell phone bill, it seems only natural to share a credit card bill. Having one less bill to pay can let you make the most of your income. Plus, when it’s time to pay off your debt, you’ll have an easier time deciding which card to pay back first.
Help one person get better credit. Adding a spouse or family member with bad credit to your credit card can help them get a better credit card. But it will only work if the credit card is managed right – the bill is paid on time and the balance is kept low. Help one person get a credit card/good interest rate where they otherwise wouldn’t. Being added as a joint user might be the only way to get your spouse a credit card, or to get them a low interest rate.
Disadvantages of Having a Joint Credit Card. Both people are legally responsible for making the payments. That means the credit card issuer can take legal action against you for charges you might not have made. You could even be sued and have your wages garnished. Credit card disagreements could cause relationship problems. In a 2008 poll conducted for CreditCards.com, 19% of respondents who shared a credit card said they had arguments with the other person about the account, while 7% said they’d canceled a shared credit card because it caused relationship problems. Breakups or divorce make it hard to manage the credit card. No matter what a divorce decree says, the credit card issuer holds you to the original credit card agreement. So if your ex-spouse isn’t paying his or her share of the credit card bills, your credit can still be affected. It’s even harder to manage the credit card bill if you sever ties with someone you were dating or even a friend or family member. One person could use the credit card to hurt the other. It sounds childish, but it happens, often after a breakup. One cardholder could go on a revenge spending splurge, leaving the other cardholder with the bill. If the revenge-seeker already has bad credit, he or she has nothing to lose from a maxed out credit card or a few more late payments.
Should You Share a Credit Card? It’s wiser to keep separate credit cards. Before you make the decision to get a joint credit card, evaluate your reasons for sharing a credit card. In the CreditCards.com survey, only 9% of respondents said they felt closer to the person after sharing a credit card. Similarly, 9% said they felt more in control of the relationship. Discuss the pros and cons of having a joint credit card. Make sure everyone understands the effect a breakup could have on your credit history.
Authorized Users. An authorized user on your credit card is someone who you have given permission to use your credit card. An authorized user can receive and use a credit card with his/her name on it, but is not legally responsible for repaying the credit card balance. The credit card payment history will appear on the authorized user’s credit report. That can be a good thing if the payment history is good, but a bad thing if the credit card payment history is bad. Unlike a joint account holder, a credit card authorized user doesn’t have to go through a credit check to be added to the credit card account. Some credit card companies may charge a fee for adding authorized users.
Is Piggybacking Illegal? There’s disagreement on whether credit card piggybacking is illegal or just deceptive. U.S. law says that someone who commits bank fraud “knowingly executes, or attempts to execute, a scheme or artifice to defraud a financial institution; or to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.”
The crime is punishable by a maximum $1 million fine or 30 years in prison or both. By definition, credit card piggybacking could be considered bank fraud, but, to date, there has been no official ruling on the practice. But used with just a modicum of common sense, this technique will assist you in raising your credit scores.