Piggybacking for a higher credit score (and better mortgage rate)

I read an article on yahoo news today about piggybacking — getting added as an authorized user to the credit card belonging to someone with good credit to improve your own bad credit. Something that’s commonly done by parents (to improve their child’s credit), or spouses, but now being offered to strangers through internet-based services. These services claim to “improve your credit overnight,” and apparently it works(!)

These services allow a person with poor credit can buy a place as an authorized user on a someone else’s credit card for $900 or so per line of credit. Which may sound pricey, until you consider this:

According to Fair Isaac, lenders would probably demand about a 9.8 percent interest rate on a $300,000, 30-year fixed mortgage for an applicant with a credit score between 500 and 579. That would translate into a $2,585 monthly payment for principal and interest.

But a borrower with a score between 760 and 850 seeking the same loan would qualify for about a 6 percent rate that would cost just $1,796 a month for principal and interest. That savings of $789 each month would total $284,040 over 30 years.

That’s big savings for the person with bad credit, over the life of the mortgage. Actually, it’s big savings on a monthly basis, too. Some people buy mroe than one credit line, to increase the effect.

How much does one of these authorized user accounts help your credit?

The effect on a credit score can vary depending on what else is in a client’s report. But one borrowed credit card account can increase a score between 30 and 45 points, two between 60 and 90 points, and five between 150 and 205 points, according to ICB. That’s because the computer program that calculates scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps lift the credit score.

That’s really good news for people with poor credit who want to buy houses and can’t get a good rate on a mortgage. It apparently only takes a month or two to improve your credit score, too, which is much faster than the usual strategies (paying off debt, making payments on time, resolving mistakes, etc.), which generally represent long term patterns.

It’s even better news for the internet-based services offering this to people — while they’re charging about $900 per credit line to people who want to improve their credit, they’re paying the people sharing their good credit $100-$200 per authorized user that they add. That adds up to a nice profit for these people, who are basically just acting as match-makers. Of course, they’re also probably incurring some measure of liability (as well as management and overhead).

Also standing to profit, of course, are the people selling their good credit. At $100-$200 a pop, if you have great credit and a few credit cards that you don’t use much, you could stand to make a good deal of money:

Brian Kinney, 44, a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories. Kinney, whose FICO score is above 800 on the scale of 300 to 850, quit his job working at a Farmers Insurance agency and uses the ICB income to tide him over until he starts his own insurance agency.

Different credit card companies, of course, have different limits on the number of authorized users. Is it safe? Apparently so, as the people who piggyback never get the full credit card account number, social security number, or information from the person whose account they’re piggybacking on. However, it doesn’t sound entirely clear-cut:

Kinney, the retired Army officer in California, said those borrowing his good credit history don’t get his personal information, full credit card number or credit card expiration dates. Any sensitive data is handled through ICB, and Kinney adds the users himself by calling his credit card company. ICB also destroys any duplicate cards that are issued to the credit renter, according to its contract.

Instead of being worried about risks he may be assuming, Kinney said borrowers are the ones vulnerable to scammers posing as do-gooders. Those seeking a credit hike give the cardholder their names and
Social Security numbers, which, in the wrong hands, could lead to identity theft. Kinney said he also receives credit card offers in the mail for the credit borrowers on his accounts, opening up another possibility for fraud, but he throws them away.

Being an opportunist, I like the idea of being able to make money off of my good credit. However, I don’t know how I would feel about other people being mailed credit cards for my account. I found another article on bankrate.com that talks about the other security measures that a credit card piggybackee can take:

Kennedy says she and her husband support eight to 10 authorized users on each of their three credit cards. She claims the thief would have to know both her and her husband’s names, account numbers, Social Security numbers, dates of birth and pass codes to use the card.

Still, Kennedy says she encourages the company’s cardholders to put a pass code on their account and has added a privacy guard to her account anytime there’s a new user so she can receive e-mail alerts regarding activity on the account.

Of course, while consumers with good and bad credit stand to benefit from this proposition (as do the services that hook them up), lenders could stand to lose considerably on this. They’re already reeling from all of the people defaulting on their subprime mortgages (although I really kind of think its their own fault for lending to people with subprime credit in the first place, that’s what a credit score is for, after all). The less they can rely on a credit score to be accurate, and reflect the credit of the actual lender (not a stranger that they’ve been hooked up with via one of these online credit piggybacking/matchmaking services), the less they can control how much risk is involved in each mortgage, and how they should compensate for that by adjusting the interest rate.

When you think about it, a loophole like this, if allowed to continue, could actually ruin things for everyone, by causing lenders to raise rates across the board…

That’s not likely to happen, however, as Fair Issac already has plans to shut this loophole down:

…Fair Isaac said it intends to announce this week that all future versions of its FICO score methodology will no longer consider authorized user accounts, said Tom Quinn, Fair Isaac’s vice president of scoring solutions.

The next version is slated to roll out in September to one of the three main credit reporting agencies — Equifax Inc., Experian Information Solutions Inc. or TransUnion LLC — with the other two agencies receiving the new version some time in 2008.

In the meantime, I kind of like the idea of making some money off of my good (770) credit. It’s not as good as the ex-marine in the article (800), but according to the bankrate article, my rate doesn’t have to actually be that high:

The cardholders whose cards are used are required to have a minimum of two years of good credit and a minimum FICO credit score of 700. Johnson says the card can still be used to make purchases, but cardholders are encouraged not to use it. Cardholders are encouraged to use another card as their primary card, instead.

I’d like to take a shot at this. A friend suggested that I could make a lot more money by selling authorized user spaces myself — taking out an ad in craigslist, for example. After all, if the going rate is $900/credit line, and the services only pay $100-$200, I could stand to make a lot more money. I would have to know what I was doing, though, and cover all of my bases security-wise, and possibly protect myself from any legal ramifications. Not to mention dealing with the piggybackers themselves, especially if the piggybacking doesn’t actually help their credit score that much (unhappy customers).

I’m going to do some research tonight, I have Instantcreditbuilders.com bookmarked. Perhaps before launching into direct-selling my credit cards to the general public, I should consider briefly sign up with one of these services to see exactly what’s involved… According to their website, this is all a credit “investor” needs:

Minimum Requirements for ICB Credit Investors –

a) Must own a Seasoned Trade Line with at least a $5,000 limit with over a 700 credit score

b) The Seasoned Trade Line must have perfect payment history
c) The Seasoned Trade Line must have Low or no balance
d) The Seasoned Trade Line must have 2+ years of seasoning
e) The Seasoned Trade Line must report authorized users to the 3 major credit bureaus

As long as your seasoned trade lines meet these specifications, you are eligible for a lucrative investment opportunity within ICB’s piggyback network. Contact us today to learn more!

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One thought on “Piggybacking for a higher credit score (and better mortgage rate)

  1. This does work to improve your credit. But the credit and credit card companies are going to change these by the end of the year. I read this in the paper last month.

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