10/20/2011 6:35 PM ET|
Does credit 'piggybacking' work?
Looking for a credit score boost? Credit repair companies use promises of this quick fix to woo people with lousy credit, but it may not help you at all.
If you've gone in search of ways to boost your bad credit score, you may have encountered a trick called "piggybacking." It's a tactic that credit repair services use to raise a consumer's score simply by adding that person as an authorized user on an account in good standing.
Such stellar accounts typically include long credit histories, high credit limits and relatively low balances -- all factors that the FICO scoring model loves to see. The result: The consumer with bad (or no) credit reaps the benefits of "piggybacking" on someone else's good credit. It sounds like an easy fix to a typically difficult problem -- after all, it usually takes a lot of time and effort to build good credit. But piggybacking won't work for everyone, despite what credit repair companies want you to believe.
A few years ago, the creators of the FICO credit scoring system announced that they would stop including authorized users in the latest version of their FICO scoring model (at the time dubbed FICO 08), effectively putting an end to what they saw as a deceptive practice and manipulation of the system. They later reversed their decision, though, after consumer advocates pointed out that FICO 08 could unfairly impact women and/or stay-at-home spouses, and lenders voiced concerns that using the new model would impede their compliance under Regulation B, which requires lenders to consider credit histories on accounts shared by spouses when assessing a married person's credit risk.
(The Credit CARD Act faced a similar backlash earlier this year for mandating that credit card issuers "consider information regarding the consumer's independent income, rather than his or her household income" before approving a new card or credit limit increase.)
FICO's change of heart was a welcome relief for many lenders and consumers, but the scoring giant was determined to put an end to the growing number of credit repair clinics exploiting the loophole to game its system. FICO's solution? In traditional FICO style, keeping a tight lid on the secret to their proprietary special sauce, the company announced that its staff of math whizzes found a way to include legitimate authorized users in the FICO 08 model while weeding out the illegitimate authorized user accounts of piggybackers.
How do they do it?
Legitimate authorized users include spouses, parents and children -- anyone who has a legitimate relationship with the primary account holder and a reason to share access on an account. While FICO won't say exactly how it differentiates legitimate authorized users and piggybackers, it's not difficult to come up with a few theories.
Given that FICO scores consider only information in credit reports, how is the company able to pinpoint whether the authorized user has a genuine relationship with the primary account holder? Maybe FICO compares the last names of the authorized user and the primary account holder, maybe it factors in previous and current addresses. It may even flag cards with more than a certain number of authorized users. This would catch the accounts that are hosting five, 10, or even a 100 authorized users -- which actually took place during the piggybacking heyday.
Possibly it's a combination of all the above. The point is, you don't have to be a credit expert or even know how FICO does it; just understand that credit report data does give telltale signs of piggybacking, and it wouldn't be extremely difficult to weed out the folks who are trying to game the system.
So why are we still talking about piggybacking several years after the fact? Two reasons. One, Credit.com has recently seen an influx of comments and questions about piggybacking services, along with claims by several credit repair companies that piggybacking still works. This means that whether or not they can benefit from piggybacking, consumers are still being wooed by companies selling the idea as a quick fix. Second, Credit.com recently reported on the the implementation of FICO 08 by mainstream lenders.
According to FICO, FICO 08 is being used by more than 3,500 lenders, and many more are in the process of adopting or completing their evaluation of the score. We know that Citi recently announced its adoption of FICO 08, and Bank of America is also in the process of implementing the new, more predictive model. A vast majority of loans are conducted by the major banks, but at this point it's unclear exactly which major banks are using the newer version; Citi and B of A are the only two to publicly share the details. And we may never know simply because banks typically do not share this type of information with the public.
While the adoption of FICO 08 may appear to be a slow process from a consumer perspective, it's actually one of the quickest transitions in the history of the FICO scoring model. According to Craig Watts, FICO public affairs director, "The lender adoption rate for FICO 08 Score has been faster than the adoption rate of any previously redeveloped FICO credit scoring model since the score was introduced in 1989. That's particularly impressive now, during the biggest economic downturn since the Great Depression."
So what does this tell us? It means that even though banks and lenders are adopting the new model, it's possible that your lender hasn't yet migrated to the new score and may be using the previous version of the FICO model when making its lending decisions. And because the previous model doesn't include the piggybacking fix, many consumers have no way of knowing whether this strategy would even help them.
So, does piggybacking to boost FICO scores still work? It does, but not if the lender is using the latest FICO 08 model.
Before you rush off to sign up for a quick FICO fix, here's a little food for thought: Even if you sign up with one of these companies and fork out a few thousand dollars in an attempt to beat the system, there's no guarantee that the lender you're applying to is using the FICO model that still allows piggybacking. Your best bet? Do it the right way. Instead of trying to beat the system, earn it. It'll make all the difference in the world in the opportunities and options that that having excellent credit affords.
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Anyway, that's my two cents.
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