In 2007 there was a lot of talk about the end of authorized user credit also known as piggyback credit, as a means to boost credit scores. The benefits of becoming an authorized user is the primary account holder’s credit can improve the authorized user’s credit scores and help build a solid credit history.
Fair Isaac Corporation (FICO) announced they were rolling out a new credit scoring model that did not factor in authorized user accounts.
Traditionally authorized user accounts have been used when spouses add one another to their already established credit accounts or parents add their children to their accounts. But companies began to emerge that offered authorized user accounts for a price.
A primary account holder would allow a limited number of unknown authorized users to be added to their good credit accounts and the company would pay the primary account holder a fee for brokering these deals.
Very similar to “renting out” your good credit for a limited term and getting paid for it. The authorized user would not actually get use of the credit account; however, they would get the benefits of the primary account holder’s good credit history. FICO considers this practice as misrepresenting a consumer’s credit risk to lenders.
The authorized user would be added for a short period of time in order to add a quick boost to their credit scores. Some of the primary accounts would be more than 20 years old with excellent payment history and very low balances — something FICO scoring looks kindly upon. According to Fair Isaac Corporation, there are more than 50 million authorized user account holders.
The industry of purchasing authorized user accounts began to get negative attention; and in response to the growing use of renting accounts, Fair Isaac Corporation developed a new scoring model that did not include authorized user accounts in the scoring formula.
FICO 08 was originally set to begin some time in 2008 and all the major credit bureaus were to begin using the new scoring model. However, critics have expressed that if FICO 08 were enforced without the use of authorized buyer credit, it would be in violation of the Equal Credit Opportunity Act.
The Equal Credit Opportunity Act requires lenders to consider a spouse’s credit history when determining the credit risk of a borrower. If authorized user credit were abolished it would have prohibited lenders from complying with the Equal Credit Opportunity Act.
Fair Isaac Corporation revised FICO 08 to simply FICO 8 which includes the use of authorized user accounts; however, they now say it has a way to recognize the abuse of authorized user accounts. It only made sense for FICO 8 to continue authorized user credit or “piggyback credit” because every generation of the FICO score formula has included authorized user credit card accounts when calculating a person’s score. FICO 8 score continues that policy.
Authorized user credit continues to benefit consumers with shared management of a credit card account. It also helps lenders by providing scores that are based on a full snapshot of the consumer’s credit history.
FICO 8 does says it “substantially reduces any benefit of so-called tradeline renting.” Stay tuned for further develops, but for now, it looks as though authorized user and piggyback credit is still a viable option in boosting credit scores.