Can Authorized User Trade Lines Really Boost Your Credit Scores?
YES! In some cases they can be a MAJOR Boost!
What are Trade Lines?
Trade Lines are a great tool to use, but they invoke many questions. This is a great post to visit prior to diving into some of the more complicated areas of Trade Lines. According to Experian.com a trade line is an entry by a credit grantor to a consumer’s credit history maintained by a credit reporting agency. A Trade Line describes the consumers account status and activity. Trade Line information includes names of companies where the applicant has accounts, dates accounts were opened, credit limits, types of accounts.
What Are Authorized User Trade Lines?
Authorized User Trade Lines (Piggybacking Trade Lines) are typically revolving lines of credit on which someone places another as an authorized user account holder. The Trade Line then appears on the user’s credit. Authorized User Trade Lines (Piggybacking Trade Lines) has been used for nearly 40 years by mortgage brokers and lenders. It became a popular way to boost credit scores because of the Equal Credit Opportunity Act 1974, which allowed the process to legally attach credit accounts to someone else.
How Can I Be Sure That It’s Both Legal and Effective?
According to Regulation B of the Equal Credit Opportunity Act, a piece of legislation passed in 1974, creditors are required to report authorized user accounts to the major credit bureaus. Because lenders and creditors don’t distinguish between different types of authorized user accounts, all of the accounts are reported. There was some debate recently about whether the FICO score should be adjusted to not include authorized user accounts. However, because lenders complained that doing so would violate Regulation B, it was decided that the new FICO 08 score formula will include authorized user accounts.
Are Authorized User Trade Lines Moral?
This is where the concept starts to cause friction. People often make good cases for and against the morality of the practice. Of course, the main point is that you are manipulating the credit system. This seemingly sensible contention is the focus of this post. The manipulation argument, as we call it, presupposes that the credit system is flawless, or even functional, in the first place.
Let’s take one hypothetical example:
Joe lost his job and fell behind on some payments. Under the new FICO model, FICO ’08, credit scores are hurt the most by recent late payments. A few months later, Joe gets a new job making 6 figures. His ability to repay a loan obviously increased and his risk of default dramatically decreased. However, the FICO model, or any model for that matter, does not take this significant fact into consideration. Now Joe is left with poor credit and a 6 figures salary. Not only is Joe suffering, but so is the economy.
A flawed credit system prevented a consumer from purchasing a product. The real estate agent loses. The loan officer loses. The banks loses... yet the credit bureaus and credit scoring companies got their money when Joe’s credit was pulled.
Secondly, the credit bureaus and credit scoring companies are simply one thing...companies. They are private corporations, who stand to financially benefit by judging you. Their job is to appeal to creditors and provide an alleged risk assessment of you. This is supposed to allow creditors to lend at lower risks of default. Notice that I didn’t say that their job was to ensure that your credit file is accurate?
So, Are Authorized User Trade Lines Legal or Not?
We cannot give you legal advice and this should not be construed as legal advice, but Authorized User Trade Lines (Piggybacking Trade Lines) is authorized by the Equal Credit Opportunity Act of 1974 and the Federal Reserve Board Regulation B.
The following is an except from: Credit Where None is Due?
Authorized User Account Status and
“Piggybacking Credit” by Robert B. Avery, Kenneth P. Brevoort and Glenn B. Canner, written March 5, 2010 and published in the Federal Reserve
Introduction
Revolving account holders, such as credit card users, may designate other individuals as “authorized users” on their accounts. An authorized user is a person who is permitted to use an account without being legally liable for any charges incurred.
When an authorized user on an account is the spouse of an account holder, the Federal Reserve Board’s Regulation B (“Reg. B”), which implements the 1974 Equal Credit Opportunity Act (ECOA), imposes two important requirements on creditors. First, when providing information to the credit bureaus, creditors are required to furnish information for the authorized user as well as for the account holders. Second, when using credit history to assess the creditworthiness of applicants, creditors are required to consider, when available, the history of accounts held by the applicant’s spouse on which the applicant is an authorized user (as well as those accounts that are jointly held).1 These requirements have been in place since Reg. B’s inception in 1975.
In promulgating these provisions of Reg. B, the Federal Reserve Board pointed to complaints received from women who were unable to obtain credit because information on accounts jointly held with their husbands was reported to the credit bureaus in the husband’s name alone. Additionally, the Board took the view that, since some state laws hold one spouse liable for debts incurred by the other, a spouse should have the “benefit or burden” of the credit history of their spouse’s accounts that they were authorized to use. Further motivation was provided by the significant role that spousal authorized users were found to play in the maintenance of an account, such that the payment history on an account was often “as much the product of the user’s contribution as that of the obligor.”
In addition to helping spousal authorized users build an independent credit history, granting authorized user status has been used to help young individuals learn to manage credit and build a credit history. This is possible because creditors generally have followed a practice of furnishing to credit bureaus information about all authorized users, whether or not the authorized user is a spouse, without indicating which authorized users are spouses and which are not. This practice does not violate Reg. B.
As a result, the information maintained in credit bureau records generally does not distinguish spousal from non‐spousal authorized users. This prevents credit scoring modelers and creditors that use credit reports from distinguishing spousal from non‐spousal authorized user accounts. Since spousal authorized user tradelines must be considered in evaluating creditworthiness to comply with the requirements of Reg. B, but may not be identifiable in an applicant’s credit record, creditors may have to consider all authorized user accounts on an individual’s credit record, regardless of whether they reflect a spousal relationship to an account holder. For this reason, credit history scores, such as the FICO score,3 have traditionally accorded authorized user accounts equal weight to the other accounts on an individual’s credit record.
The practices described above have the unintended consequence of creating the opportunity for “piggybacking” credit to emerge. Piggybacking occurs when an individual becomes an authorized user on an account for the sole purpose of improving that person’s credit history. Because of the manner in which authorized user information is reported to the credit bureaus, the full credit history of an account is reflected on the credit records of both an account holder and an authorized user, regardless of when the authorized user was added to the account. Consequently, a person’s credit report may reflect several years of account history as soon as that person becomes an authorized user. If the account has desirable characteristics (such as a low utilization rate or a good payment history), this may improve the authorized user’s credit risk profile and credit scores. The result may be enhanced access to credit and reduced borrowing costs.
Beginning in 2007, companies began to emerge to help borrowers with poor credit histories piggyback on the good credit history of others. Individuals pay a fee to these companies to locate an account holder who is willing to add this person to their account in exchange for a portion of the fee.4 The person added to the account is an authorized user in name only, as the individual receives neither the account number nor an access device (such as a credit card) and consequently cannot use the account for purchases.5 By piggybacking on someone else’s account history, however, an authorized user may be able to improve their credit score in advance of a credit application, potentially resulting in lower borrowing costs or an ability to qualify for credit that otherwise would not be extended.
To read more about the topic, visit the Federal Reserver PDF.
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