Did you know that over 16% of Americans have a poor credit score? This means their FICO score is between 300-579, or their Experian score is between 561–720. This is alarming because a bad credit score can make securing loans, renting apartments, or even getting a job challenging. It can also lead to higher interest rates on credit cards and loans, increased insurance premiums, and difficulty starting a business or obtaining a cell phone contract.
Fortunately, there are several ways to improve one’s credit. One of the most effective yet less-known approaches is credit piggybacking. Imagine a piggy bank where you gradually save money over time. Similarly, credit piggybacking allows you to “save” your credit history by becoming an authorized user on someone else’s credit card, benefiting from their established credit history to build your own.
Understanding Credit Piggybacking
In the context of credit, “piggybacking” means riding on someone else’s established credit history, just as a person riding piggyback benefits from the strength and effort of the person carrying them, an authorized user benefits from the creditworthiness of the primary cardholder. As stated, this method allows the authorized user to build their credit profile more quickly than they could on their own.
People often resort to piggybacking to improve their credit scores quickly. The ultimate goal is to build credit, ideally achieving a tier 1 score. To be clear, what is tier 1 credit? Tier 1 or “excellent” credit is the highest credit score range, usually between 750 and 850. Achieving this level opens the door to the best interest rates, loan terms, and credit opportunities.
Here are the other credit tiers:
- Tier 2 (Good Credit): Scores typically range from 700 to 749. While not the highest, individuals in this tier still receive favorable interest rates and terms.
- Tier 3 (Fair Credit): Scores generally fall between 650 and 699. This tier often results in higher interest rates and less favorable loan terms.
- Tier 4 (Poor Credit): Scores usually range from 600 to 649. Individuals in this tier may struggle to get approved for loans and, if approved, will likely face high interest rates.
- Tier 5 (Bad Credit): Scores below 600. This tier makes it very challenging to secure loans or credit, often resulting in the highest interest rates and most stringent terms.
These credit score tiers are a standardized way to evaluate an individual’s creditworthiness. They help lenders, creditors, landlords, and even employers understand the risk associated with a person based on their credit history.
FICO and Experian, two major players in the credit scoring and reporting industry, use similar ranges but can be slightly different. For more detailed information, please refer to their official websites.
The Benefits of Credit Piggybacking
In addition to the potential for a quick boost in credit scores, credit piggybacking provides a way for individuals with little or no credit history to establish themselves. It can serve as a valuable stepping stone to building a solid credit foundation, especially for young adults or recent immigrants with no or poor credit profiles.
Another advantage is that as an authorized user, the positive credit history of the primary cardholder is reflected on your credit report. This can be especially useful for those who need to improve their credit scores in a short amount of time, such as before applying for a loan or mortgage.
Credit piggybacking also offers a learning opportunity. Authorized users can learn about responsible credit management by observing the primary cardholder’s financial habits. For example, seeing how the primary cardholder pays bills on time and keeps credit utilization low can provide valuable insights into maintaining a good credit score.
The Drawbacks of Credit Piggybacking
While there are clear benefits, credit piggybacking also has its downsides. One significant risk is the potential for negative impact if the primary cardholder mismanages their credit. If they miss payments or carry high balances, it can harm the credit scores of all authorized users on the account. To avoid such cases, it’s essential to maintain open communication with the primary cardholder to stay informed about any changes in their credit habits.
Additionally, some credit scoring models and lenders may not give full weight to an authorized user’s credit history. They might consider the primary cardholder’s credit behavior less indicative of the authorized user’s financial responsibility.
This means that the impact of piggybacking can vary depending on the lender and the specific credit scoring model used. As a result, the benefits of credit piggybacking may not always be as significant as expected.
There are also ethical and legal considerations. Some view credit piggybacking, especially when done through third-party companies, as a loophole or even as credit fraud. In some cases, these third-party companies charge high fees for their services, adding financial risk for the authorized user. It’s essential to understand these perspectives and proceed with caution.
Final Thoughts
Credit piggybacking is a good option for building credit. It particularly benefits those with little to no credit history, such as young adults just starting out, recent immigrants, and people who have avoided credit cards in the past but now need to build a credit profile. If you need more information or seek personalized advice, speaking to professionals is always recommended.
