Definition
Piggybacking (Credit Score) is a financial scheme in which an individual with a poor credit history is added as an authorized user on the credit account of someone with a stellar credit history. This association allows the person with poor credit to benefit from the good credit history of the account holder, resulting in an improved credit score. Typically, the original account holder is compensated for allowing this arrangement. The practice raises ethical and legal questions, as it may misrepresent an individual’s creditworthiness to potential lenders who rely on credit scores for underwriting decisions.
Examples
-
Example 1:
- John has a poor credit history and is struggling to secure a loan with a favorable interest rate. He finds a company that promises to enhance his credit score for a fee. This company arranges for John to be added as an authorized user to Mary’s credit card account. Mary has an impeccable credit score and payment history. As a result, John’s credit score improves significantly, allowing him to qualify for a better interest rate on his loan.
-
Example 2:
- Lisa wants to buy a house but her credit score is too low to qualify for a mortgage. She finds a service that offers to improve her credit score by piggybacking on existing credit accounts. For a fee, she is added as an authorized user on multiple credit accounts with good histories. Her credit score increases, and she is able to apply for and obtain a mortgage with favorable terms.
Frequently Asked Questions
What is piggybacking in the context of credit scores?
Piggybacking is the practice of being added as an authorized user to someone else’s credit account, allowing you to benefit from their good credit history and improve your own credit score.
Is piggybacking legal?
The legality of piggybacking is murky. While not explicitly illegal, the practice can be considered fraudulent if it misleads lenders about a person’s true creditworthiness.
Can piggybacking improve my credit score?
Yes, piggybacking can improve your credit score by associating your credit profile with an account that has a strong payment history and low credit utilization rate.
Are there risks involved with piggybacking?
Yes, there are several risks including potential legal issues, ethical concerns, and the possibility of the original account holder defaulting, which could negatively impact your credit score.
How do lenders view piggybacking?
Lenders may view piggybacking skeptically and consider it an attempt to manipulate credit scores. It can undermine trust in the credit evaluation process.
Related Terms
- Credit Score: A numerical expression based on a level analysis of a person’s credit files, representing the creditworthiness of an individual.
- Authorized User: A person who has permission to use a credit account and whose activity can affect the credit history and score of the primary account holder.
- Credit History: A record of a person’s borrowing and repayment activity, which is used to assess creditworthiness.
- Underwriting: The process by which a lender or insurer evaluates the risk of lending money or insuring someone.
- Credit Repair: The process of improving a person’s credit score and creditworthiness through legal and legitimate means.
Online Resources
- Credit Karma: Offers free credit scores, reports, and insights to help improve your financial health.
- Experian: Provides credit solutions including credit reports and monitoring, as well as education on improving credit scores.
- FICO: Learn more about credit scores, how they are calculated, and what steps can be taken to improve them.
References
Suggested Books for Further Studies
- “Credit Repair Kit For Dummies” by Steve Bucci
- “The Credit Repair Black Book: Credit Repair Secrets and Strategies the Credit Bureaus Won’t Tell You” by Mark McCloud
- “Your Score: An Insider’s Secrets to Understanding, Controlling, and Protecting Your Credit Score” by Anthony Davenport
Real Estate Basics: Piggybacking (Credit Score) Fundamentals Quiz
### What is piggybacking in the context of credit scores?
- [x] Being added as an authorized user to another person's credit account to improve your own credit score.
- [ ] A method of obtaining dual mortgages for one single property.
- [ ] Putting up one property as collateral for several different loans.
- [ ] The practice of reporting multiple credit scores from various agencies.
> **Explanation:** Piggybacking involves being added as an authorized user to benefit from the good credit history of someone else's account.
### Is piggybacking always legal?
- [ ] Yes, it is universally accepted as legal.
- [x] No, it can be seen as fraudulent and is of dubious legality.
- [ ] Only legal if done within the family.
- [ ] It is legal but frowned upon by financial institutions.
> **Explanation:** The legality of piggybacking is not clearly defined and it can be seen as an attempt to fraudulently improve one's credit score.
### Who benefits from piggybacking in credit scores?
- [x] The person with a poor credit history.
- [ ] Only the primary account holder.
- [ ] Banks and lenders.
- [ ] The credit agencies.
> **Explanation:** The individual with the poor credit history benefits as their score improves due to the good credit of the primary account holder.
### What is a potential risk of piggybacking for the authorized user?
- [ ] Excessive wealth accumulation.
- [ ] Immediate creditor forgiveness.
- [x] The primary account holder defaulting.
- [ ] Instant debt cancellation.
> **Explanation:** If the primary account holder defaults, it could negatively impact the authorized user's credit score.
### Which sector views piggybacking skeptically?
- [ ] Retail industry.
- [ ] Agriculture sector.
- [ ] Hospitality industry.
- [x] Financial institutions and lenders.
> **Explanation:** Financial institutions and lenders view piggybacking skeptically because it can manipulate and mispresent a person's creditworthiness.
### What should an account have to successfully impact a piggybacking request?
- [x] A good payment history.
- [ ] High interest rates.
- [ ] Numerous credit inquiries.
- [ ] A recent opening of the account.
> **Explanation:** The account should have a good payment history to positively influence the credit score of an authorized user.
### Can piggybacking be considered a credit repair strategy?
- [x] Yes, but it can be ethically and legally questionable.
- [ ] No, it is universally considered illegal.
- [ ] Only if conducted by a certified financial planner.
- [ ] Yes, and it is the most preferred method.
> **Explanation:** Although used as a credit repair strategy, piggybacking is ethically and legally questionable and may not always be legitimate.
### Which term is directly associated with piggybacking?
- [ ] Mortgage refinancing.
- [ ] Foreclosure.
- [x] Authorized user.
- [ ] Equity stripping.
> **Explanation:** Authorized user is directly associated as this individual benefits from being added to another person’s good credit account.
### What is an immediate consequence of successful piggybacking?
- [ ] Acquisition of property.
- [x] An improved credit score.
- [ ] Increased existing debt.
- [ ] Immediate graduation from subprime status.
> **Explanation:** The immediate consequence is an improved credit score due to association with a well-maintained account.
### Who primarily loses trust due to piggybacking practices?
- [ ] General public.
- [ ] Educational institutions.
- [x] Lenders and financial institutions.
- [ ] Local governments.
> **Explanation:** Lenders and financial institutions lose trust due to the potential for misrepresented creditworthiness via piggybacking.
