To understand piggybacking, it is essential to understand the first credit score and its importance. A credit score is a score that depicts a customer’s creditworthiness. It ranges from 300 to 850. The higher the score, the more the customer is creditworthy in the eye of a lender.
A credit score is based on the customer’s credit history. A customer’s credit history is a statistical metric to measure the ability of a customer to repay the debt which is recorded in a report termed as a credit report. A consumer’s credit report details the number and types of credit accounts, how long each account has been open, amounts owed, the amount of available credit used, repayment history, and the number of recent credit inquiries.
The credit score model was created by the Fair Isaac Corporation, FICO, and is used by most of the financial institutions. You can improve it by repaying loans on time and keeping debt low.
How Credit Scores Work
It is very important to maintain a high credit score as it affects one’s financial life. It plays a vital role in a financial institute’s decision to lend credit. People with lower credit scores below 640 are considered as subprime borrowers. Financial institutions often charge a hefty interest rate in order to compensate for the risk carried by these borrowers. They might even offer shorter repayment terms or ask for a co-signer for such customers.
Alternatively, a credit score of 700 or above is considered healthy and may result in a borrower to receive a lower interest rate, which results in paying less money as interest over the life of the loan.
Credit Scores greater than 800 are considered excellent.
Below is the average FICO score range used by the financial institutes as a reference-
Excellent: 800 to 850
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579
A person’s credit score may also determine for a lender to review whether to change an interest rate or credit limit on a credit card.
There are three major credit reporting agencies in the United States (Experian, Equifax, and Transunion), which report, update, and store client’s credit histories. These agencies evaluate the credit score based on five main factors –
- Payment history 35%
- The total amount owed or credit utilization 30%
- Length of credit history 15%
- Types of credit 10%
- New credit 10%
When the information is updated by the credit reporting agency in the credit report, the credit score changes and can rise or fall based on the new information updated. Here are some ways in which customer can boost their credit score-
- On-time bill payment: Six months of on-time payments is required to see a noticeable difference in your score.
- Up your credit line: If you have credit card accounts, call and inquire about a credit increase. If your account is holding a good credit reputation, financial institutes can increase your credit limit and this will lead to an improvement in your credit score by maintaining a lower credit utilization rate.
- Avoid closing credit card accounts: If you are not using a certain credit card, it is best to stop using it instead of closing the account. However, you should monitor this card twice a year to detect any accidental or suspicious transaction happening on the card which might hurt your credit score.
- Choose the best credit repair agency: If you don’t have the time to improve your credit score, credit repair companies will negotiate with your creditors and the three credit agencies on your behalf, in exchange for a monthly fee.
- Monitor your score: One should monitor their credit score every six months and use the best credit monitoring system to keep your information secure.
- You can use piggybacking credit technique to increase your credit score.
Piggybacking credit and how it works?
Piggybacking is a less familiar method to boost your credit score. As discussed above, a low credit score can occur because of many reasons such as late payment made by you because of some financial crisis or you are a student with a low credit history and now you have a reason to build your score. Whatever your goal is, it is important to understand Credit Card piggybacking works before you can use it.
Credit Card Piggybacking is a technique in which a person becomes an authorized user on the credit card of another person (or an account holder) for boosting their credit score. An authorized person is different from a joint account holder. The difference is that authorized users are not legally responsible for charges made on the credit card whereas joint account holders are.
However, the authorized user gets the benefit of account history reflected on their credit report by the transaction done by the account holder. They get characteristics such as repayment history, account’s age and the utilization rate in their credit report.
With a positive impact, the credit score of the customer is boosted whereas if there is a negative impact on the card, the credit score is reduced.
There are two ways in which piggybacking can be done.
- Person-to-Person Piggybacking
A family member or relative with excellent credit may be willing to share their good credit reputation with you. That person would contact their credit card issuer and add you as an authorized user. You can either issue a card in your name or not.
If you get a card, you can use it and make a payment. However, you don’t have a privilege to increase or lower the credit limit. However, you need to be careful in choosing the right person as a primary holder because if he defaults on repayment, then it will be reflected in your credit history as well.
Couples and children can get the benefit of piggybacking which in turn leads to credit score improvement.
- For-Profit Piggybacking
If you can’t find a credit refuge from your family and friends, you can turn to a tradeline credit repair agency. These agencies will tag you with a cardholder who has a great credit history and add you to the person’s credit card by charging you a fee. However, you will not receive the actual card.
These piggybacking companies are controversial. They aren’t violating the laws by facilitating piggybacking, but they are still risky. You are renting a credit from a person who is completely stranger and wants to make a profit because of their great credit score and you are using a for-profit business as an intermediary to do it. In these situations, you’re giving a great deal of trust to an organization and a person might not have your best interest in mind.
Advantages of piggybacking credit technique
- This technique helps authorized users to boost their credit score in case they were having a sparse credit history.
- Your overall credits limit increases, which could lower your credit utilization ratio if the balance on the card you are piggybacking onto is kept low.
- Depending on how long the account has been open, you might increase the length of your credit history or shorten it. Longer credit history is positive because it means you have more experience in managing credit.
- You get the cardholder’s good record of on-time payments added to your credit report.
Does it really work?
Credit repair agencies have found that customers with thin credit files or subprime borrowers get significant benefit from piggybacking credit with average score gains, ranging from 45 to 64. Piggybacking is useful only if a financial institution reports authorized users. Sometimes, credit card companies do not report authorized users to credit agencies making this activity a waste.
What are the risks?
There are many risks of piggybacking credit to both account holders and authorized users.
- If the account holder gives access to the card to the authorized users, then he has the risk to do all the repayments on purchases made by the authorized user. You can reduce the risk by monitoring the credit score of the user and remove him or her once the score has increased. You can also lower the credit limit for the user.
- An authorized user is also at a risk as a default in payment by the account holder can negatively impact both user and owner’s score.
Piggybacking credit is a good credit boosting method for individuals with thin credit scores. It’s also useful for people who don’t trust themselves to build their own credit rating with a credit card. Your credit score is a number that can cost or save you a lot of money in your lifetime. A very good score of more than 700 can help you reduce interest rates on the mortgage which means you will pay less interest for the credit you have taken from an institute. But a bad credit history can be harmful to your financial health. So, it is imperative for a customer to improve its credit health and inculcate good habits to maintain it all the time.