What is Credit Piggybacking?

Understanding Credit Piggybacking: A Strategic Approach to Building Credit

In the intricate landscape of personal finance, credit scores wield a substantial influence, impacting everything from securing a loan for a dream car to renting an apartment or even landing that coveted job.

For individuals seeking to build credit from scratch or bolster an existing but weak credit profile, navigating this terrain can be daunting. Enter “credit piggybacking” – a strategy that has garnered attention for its potential to expedite the credit-building process.

However, before diving headfirst, it’s crucial to understand what credit piggybacking entails, how it works, and the advantages and disadvantages it presents, alongside the ethical considerations associated with this practice.

Demystifying Credit Piggybacking

Credit piggybacking, also known as authorized usership, involves leveraging the established credit history of another individual to enhance one’s own credit profile.

Essentially, someone with limited or poor credit can benefit by being added as an authorized user on the credit card account of someone with a strong credit history (the primary account holder).

By doing so, the positive payment history and low credit utilization ratio (the amount of credit used compared to the credit limit) of the primary account holder can potentially improve the credit score of the authorized user.

The Mechanics of Piggybacking

The process typically involves the primary cardholder contacting their credit card issuer and requesting to add an authorized user to their account. Once added, the authorized user receives a card linked to the primary account. It’s important to note that the authorized user typically doesn’t have access to the primary account holder’s credit line or the ability to make changes to the account. Their primary purpose is to benefit from the positive credit history reflected on the account. This reported history may include factors such as:

• Length of Credit History: A longer credit history on the primary account can positively impact the authorized user’s credit score. Age of credit is a significant factor in determining creditworthiness.
• On-Time Payments: Consistent on-time payments by the primary cardholder can significantly improve the authorized user’s credit score. Payment history is the most critical factor influencing credit scores.
• Credit Utilization Ratio: A low credit utilization ratio on the primary account (typically below 30%) can positively influence the authorized user’s score. A low utilization ratio demonstrates responsible credit management.

Beyond the Basics: Different Types of Piggybacking

There are two main approaches to credit piggybacking, each with its own nuances:

• Traditional Piggybacking: This involves being added as an authorized user to a friend’s or family member’s credit card account. This is the most common form of piggybacking and relies on a trusting relationship between the primary account holder and the authorized user.
• Paid Piggybacking: This approach involves paying a fee to be added as an authorized user on a stranger’s credit card account. This practice is generally discouraged due to the inherent risks and ethical concerns.

Weighing the Pros and Cons: A Nuanced Approach

Like any financial strategy, credit piggybacking comes with a set of advantages and disadvantages to consider:

Advantages:

• Quick Credit Building: For individuals with limited or no credit history, credit piggybacking offers a shortcut. Positive account activity, including on-time payments and a low credit utilization ratio, is reported on their credit report, helping them build credit faster. This can be particularly beneficial for young adults or newcomers to the credit system.
• Potential Score Boost: Being added as an authorized user to an account with a long and positive credit history can lead to an immediate increase in the authorized user’s credit score. This improvement can open doors to better financial opportunities sooner rather than later.
• Access to Better Financial Products: A higher credit score unlocks access to a wider range of financial products with more favorable terms, such as lower interest rates on loans, higher credit card limits, and potentially better terms on rental agreements. This can translate to significant savings and improved financial flexibility in the long run.

Disadvantages:

• Dependency on Primary Account Holder: The authorized user’s credit score becomes inherently tied to the primary account holder’s financial behavior. If the primary cardholder misses payments or accumulates debt, it can negatively impact the authorized user’s credit score. This highlights the importance of choosing a trustworthy primary account holder with a history of responsible credit management.
• Limited Control: As an authorized user, individuals have limited control over the account and no legal responsibility for repayment of any charges incurred. This lack of control can be a drawback, especially for those seeking to establish a robust and independent credit history through responsible credit management. They may not be able to build their own creditworthiness through responsible card use.
• Ethical Concerns: While credit piggybacking itself is not illegal, ethical considerations arise, particularly if the arrangement is solely for the purpose of artificially inflating credit scores. Some individuals may attempt to sell authorized user slots on their accounts to those seeking a quick credit score boost. This not only exploits a potential loophole in the credit system but also undermines the very foundation of a credit score – a reflection of responsible credit management.

Potential Risks and Mitigation Strategies

Engaging in credit piggybacking, particularly paid piggybacking, comes with inherent risks that need to be carefully considered:

• Fraudulent Activity: There’s a chance the primary account holder might engage in fraudulent activity, negatively impacting the authorized user’s credit score.
• Identity Theft: Sharing personal information to be added as an authorized user carries the risk of identity theft, especially in paid piggybacking arrangements.
• Unexpected Account Closures: If the primary account is closed for any reason, the positive credit history associated with it may be removed from the authorized user’s credit report.

Mitigation Strategies:

• Choose a Trustworthy Primary Account Holder: Only participate in traditional piggybacking with a close friend or family member you trust implicitly to manage their credit responsibly.
• Monitor Your Credit Report Regularly: Regularly monitor your credit report to ensure all information is accurate and identify any potential fraudulent activity.
• Communicate Clearly: Clearly communicate expectations and responsibilities with the primary account holder before entering a piggybacking agreement.

Alternatives to Credit Piggybacking

While credit piggybacking can be a helpful tool, it’s not the only option for building credit. Here are some alternative strategies to consider:

• Become an Authorized User on a Responsible Account: If piggybacking isn’t an option, consider becoming an authorized user on a responsible partner’s or parent’s account who manages credit well.
• Secure a Secured Credit Card: Secured credit cards require a security deposit but function similarly to traditional credit cards. On-time payments with a secured card can positively impact your credit score.
• Become a Cosigner on a Loan: Cosigning on a loan for a trusted friend or family member with good credit can help build your credit history, but proceed with caution and understand the potential risks involved.
• Become a Renter and Make On-Time Payments: On-time rental payments can be reported to credit bureaus and positively impact your credit score. However, not all landlords report rental payments, so verify beforehand.

Final Thoughts: A Calculated Approach

Credit piggybacking can be a valuable tool for individuals looking to expedite the credit-building process or improve their credit scores.

However, it’s essential to approach this strategy with caution and a clear understanding of the potential benefits and drawbacks.

Carefully consider the ethical implications and choose a trustworthy primary account holder if opting for traditional piggybacking. Regularly monitoring your credit report and exploring alternative strategies like secured credit cards or cosigning on loans (with caution) can further strengthen your creditworthiness.

Remember, building a strong credit score takes time and responsible financial management. Credit piggybacking can be a helpful shortcut, but it should not be a substitute for building a healthy relationship with credit.