Seasoned Tradelines

To paraphrase your question a bit, you ask, "Is piggybacking on someone else’s strong tradeline with the intention of raising my credit score legitimate?" The answer depends on your definition of the word legitimate and if you look at the question as a:

• Consumer who wants to boost their credit score
• Lawyer representing a consumer who wants to boost their credit score
• Mathematician working for Fair Isaac & Co. (FICO) or another credit scoring provider
• Potential creditor deciding whether to lend someone a large sum
• FTC or Federal Reserve Board staff member

Before discussing these perspectives, let us define a few terms.

Tradeline Definition

A tradeline is an item on a credit report that refers to a past or present credit relationships. Tradelines include vehicle loans, credit cards, mortgages, leases, and other loans. A credit report lists separate tradelines for each account or credit card number, whether open or closed.

A seasoned tradeline is current with a history of timely payments. Some definitions state a seasoned tradeline is more than two years old.

Credit Score Definition

The three major credit reporting agencies — Equifax, Experian and TransUnion — each report consumer credit scores. Equifax and TransUnion base their credit scores on a FICO formula. FICO is developed by Fair, Isaac & Co. Experian relies on a formula it developed and calls the PLUS Score. The three credit reporting agencies also use VantageScore, a competing score technology to FICO and PLUS Score.

FICO, PLUS Score, and VantageScore are calculated using mathematical methods that incorporate credit history, amount of credit used and available, number of late and on-time payments, whether any payments due are in default, and other variables. The credit report lists specific accounts and financial history that go into the credit score. Proponents of FICO, PLUS Score, and VantageScore claim their scores are superior to the competition at predicting future consumer behavior. High number are supposed to indicate a high level of credit worthiness, whereas low scores represent a higher risk of default.

FICO, PLUS Score, and VantageScore superiority claims are unsubstantiated because all three formulas are trade secrets and are impossible for third parties to test.

Creditors and Credit Score

Creditors use a person’s credit report when deciding whether to grant an applicant a line of credit or underwrite a loan. The easiest way to answer the yes or no question is to pick a number in a credit score as the threshold. Above a certain number puts the applicant in the maybe pile, and below a certain number merits a definite no.

Piggybacking Definition

Adding an authorized user to a strong account is known as piggybacking. Before 2007, authorized users got the benefit (or harm) from that account’s history. If a particular account’s history contained on-time payments and low account balances and a long history, the authorized user got the benefit of that strong history. Conversely, if an account was rife with late payments and high balances, the authorized user’s credit score was damaged.

In 2007, Fair Isaac Company, the creator of the FICO score, reversed the long-standing policy of counting piggybacked accounts on an authorized user’s credit score. In 2008 Fair Isaac reversed the 2007 policy, and then in 2009 it announced another refinement when it rolled out FICO 08, the latest edition of its scoring algorithm.

The FICO 08 press release reads in part, "FICO 08 helps lenders protect against authorized-user account ‘piggybacking’ by incorporating new patent-pending technology that materially reduces the potential score impact associated with the abuse of authorized user accounts. By considering authorized user accounts in score calculations, FICO 08 continues to support lenders’ abilities to comply with federal regulations."

In other words, if a potential lender is using FICO 08 software (the current version in 2011), and it encounters a consumer who is an authorized user on a spouse’s seasoned and good-credit credit card, that user will get a boost in their credit score. On the other hand, if a potential creditor is using FICO 08 software and it encounters a consumer who is an authorized user on a seasoned and good-credit credit card owned by a non-spouse, that consumer’s credit score will not be boosted.

VantageScore excludes authorized user tradelines from its models, but PLUS Score includes it.

Buying or Renting a Seasoned Tradeline

A half-dozen companies and local entrepreneurs using Craigslist offer cash-rich but credit-score-poor consumers the opportunity to rent time as a authorized user on a seasoned tradeline. The cost varies, but $500 per tradeline is a common amount. The renter has no access to the seasoned tradeline account, and is not given the expiration date or three-digit security code on the account.

The results, according to a 2010 Federal Reserve Board study of piggybacking are most effective for consumers who have a short credit history. Piggybacking can boost a consumer's marginal credit score into prime territory.

Is Piggybacking Legal or a Scam?

From the consumer's perspective, piggybacking can result in the consumer qualifying for lower interest rates, which will save the consumer many thousands of dollars over the life of a mortgage or vehicle loan. Piggybacking is allowed and even expected by credit card companies between spouses and between parents and their children. If renting a seasoned tradeline keeps more money in a consumer's pocket by reducing interest costs, how is that a harm to the consumer?

A consumer's lawyer will find there is no law prohibiting piggybacking between strangers. Credit card companies, in general, do not have policies prohibiting the practice.

A FICO mathematician will almost certainly have a different perspective on the legitimacy question. Credit scores are meant to predict a consumer's credit worthiness, although credit scores are now sold to employers and insurance companies as tools to predict other behaviors as well. By gaming the system, the consumer boosts his or her credit score unfairly, which reduces the confidence level of the scores' predictive ability.

Potential creditors want a cheap, easy, and reliable means of assessing the risk of potential borrowers. Creditors may argue that by gaming the system to allow less-creditworthy consumers access to prime loans, their eventual defaults raise the costs of loans for everyone. Creditors may be more reluctant to offer loans, or use more expensive means of determining creditworthiness.

Regulators, such as the FTC, are tasked with protecting consumers. It is difficult to see how FTC regulation in this area would benefit consumers, unless the seasoned-tradeline brokers are not fulfilling their promises to rent the seasoned tradelines to customers.

Recommendation

If the creditor is using FICO '08 or VantageScore, then renting time as an authorized user on a seasoned, low-balance tradeline is a waste of money. However, not all creditors are using the latest version of FICO, or rely on PLUS Score. Therefore, there is a terrific risk of failure in renting or buying time as an authorized user on a seasoned tradeline.

A more certain means to improving a credit score is to practice good credit hygiene, diversify the credit portfolio, and keep the oldest account open.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com