People with bad credit can spend years trying to make up for past mistakes. But an increasing number of people have found a quicker way: buying a share of someone else's good credit rating.
The practice is called piggybacking, and lenders and credit reporting agencies aren't happy about it. At first, it may sound like identity theft. But people with good credit are voluntarily working with those with bad credit. In fact, according to a recent AP story, you can make decent money selling your good credit -- with the financial companies that act as intermediaries taking a cut as well.
How it works
The idea behind piggybacking is elegantly simple. By adding someone as an authorized user on your credit card, you essentially give him access to your good credit. Obviously, you wouldn't want to let a stranger actually use your credit card to make charges. Yet according to the companies offering the service, you don't have to. No one will get your full credit card number or be able to order a duplicate card.
The surprising thing about piggybacking is how quickly it works. Once the credit card company makes its regular report to the credit reporting agencies, you can remove the person with bad credit from your credit card. Yet because of the way credit reports work, the positive history will remain on the piggybacker's credit report. In some cases, this can improve the piggybacker's credit score by hundreds of points, potentially saving thousands of dollars on mortgages or other loans.
Changing the rules
As you might expect, businesses that depend on accurate credit information are taking steps to prevent people from inflating their credit scores artificially. Fair Isaac (NYSE:FIC) will no longer consider authorized user accounts in determining FICO scores, the most commonly used credit score. Until these changes take effect, however, lenders will have to look more closely at credit reports and applications to ensure that they're getting full compensation for their risk. Otherwise, they face the same dangers that have brought subprime lenders like New Century, Novastar Financial (NYSE:NFI), and Accredited Home Lenders (NASDAQ:LEND) to their knees.
Given how easy it's been for some people to improve their credit without any effort, you shouldn't expect piggybacking to survive for long. Already, government officials are questioning the legality of the practice. And the financial industry can't afford to make ill-informed decisions that will cost it a lot of money.
