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Piggybacking, meant to jump-start credit, can backfire

If parents' credit tanks, young people should be prepared to cut ties

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Thinking about becoming an authorized user on another person's credit card account?

Young people hoping to get a boost in their credit scores by "piggybacking" on Mom or Dad's credit card accounts may find the move could backfire on them and actually have the opposite effect than they intended.

Young adults and credit cards: Law brings big change
Young adults and credit cards:
Law brings big changes

Beginning in February 2010, young adults' access to credit cards will be curtailed, as will credit card marketers' access to students, as part of a far-reaching reform law. CreditCards.com looks at how the changes will affect the industry, parents and young adults.

Yes, becoming an authorized user -- also called "piggybacking" -- on someone else's credit card account can boost credit scores of people who have no credit histories of their own or bad credit records. But if the primary account holder's credit profile begins to deteriorate, the piggybacker rides downhill, too, losing points off her credit score and maybe being turned down for loans.

That downside risk is becoming more important, especially for young people. That's because becoming an authorized user on a parent or other adult's account will be one of the few alternatives for people under 21 to get credit cards once the new Credit CARD Act of 2009 fully takes effect Feb. 22, 2010.

Among other things, the law bans credit card companies from issuing cards to anyone younger than 21 unless parents or other adults co-sign on the accounts. Young adults will only be able to obtain credit cards in their own names if they can show they have the means to repay the card loans. Having a co-signer means both the young adult and the parent are responsible for repaying the debt. It's different from being added to a card account as an authorized user or piggybacker, in which the primary account holder is solely liable for the bill.

Drilling Mom and Dad on their finances
Consumer advocates and credit counselors say it's a good idea for young adults to ask their parents or other adults a few questions BEFORE piggybacking on their accounts. Put bluntly, the important questions are:

  • "How is your credit, Mom and Dad?"
  • "Are you making your payments on time?"

" ... [S]tudents have to know more than they are likely to know about their parents' finances," says Gail Hillebrand, an attorney and consumer advocate with Consumers Union, the nonprofit publisher of Consumer Reports magazine. She acknowledges quizzing parents about their financial health can be difficult conversations, "especially if Mom and Dad are writing checks for tuition ... It's an awkward situation."

Getting off a 'piggyback'

Young adults need not be saddled with their parents' bad credit records if they are authorized users on accounts. They can call the credit card issuer to request immediate removal from the account. The primary account holder's payment history will then no longer appear on the young person's credit report. But the bad news is that young adults will again have no credit record if they haven't established some credit history of their own.

She notes parents may hide their true financial situation out of embarrassment or in an attempt to shield their hard-studying children from extra stress.

"If you suspect that's an issue, it probably means you don't want to be an authorized user on that account anymore," says Hillebrand.

How 'piggybacking' works
Credit card issuers report both positive and negative payment information about an account to the three major credit reporting agenies: TransUnion, Equifax and Experian. With some exceptions, the account's entire payment history appears on the credit reports of both the account holder and any authorized users on the account with notations indicating whether they are authorized users. Thus, an authorized user's credit score could be hurt if the primary account holder begins to miss payments -- a much more common occurrence in today's rocky economic times and job losses.

The good news is that the major card issuers allow authorized users to call or write to request that their names be taken off the accounts. (See table.) In most cases, the change takes effect immediately on the credit card account, but may take longer to be removed from the piggybacker's credit report.

How credit reporting bureaus handle authorized user accounts
"The name changes typically occur in real time," says Sam Wang, vice president of public affairs for Citi. "We suggest that the cardholder contact us to reconfirm the change in case they have questions."
Different rides for piggybackers
Credit bureaus' reports inconsistent ...
Credit bureau All of main account holder's information reported on authorized user's credit report?
Equifax

Yes

TransUnion

Yes

Experian

No (positive data only)

... As are the resulting credit scores
Credit scoring model Considers authorized user accounts in credit score?
FICO

Yes

VantageScore

No

TransUnion proprietary score

No

Experian spokeswoman Maxine Sweet says it could take 30 to 60 days from the time the credit bureau receives the request for information from the primary cardholder's account to no longer appear on the authorized user's credit report. "It will be updated with the credit reporting companies after the next reporting cycle and will no longer be reported for that individual," Sweet says.

Experian, however, will allow authorized users to request that information be removed sooner, according to Sweet. She says people who want the account information removed quickly can contact Experian. The data will be removed only from Experian's report -- not the two other reporting agencies. Consumers are still advised to contact the credit card issuer and request removal from the account to ensure that the issuer will no longer send information about the authorized user to all three credit bureaus.

Experian accentuates the positive, eliminates the negative
Not every credit reporting bureau treats authorized user information the same. Experian -- unlike TransUnion and Equifax -- does not include negative payment information on the authorized user's credit report.

"Experian does not report the account for an authorized user if there are missed payments," says Experian's Sweet. "So, young people do not have to worry about having their credit ruined by Mom and Dad if they do not have responsibility for the account."

She adds: "A bankruptcy would only be reported on the individual who filed for bankruptcy. Any negative condition we do not put on the authorized user's report."

How credit scores factor in authorized user accounts
According to Equifax spokeswoman Jennifer Costello: "Equifax reports information on the account that is sent to us by the creditor whether it is an individual, joint or authorized user account."  Steven Katz, director of consumer brands for TransUnion, adds: "The history of the account (both positive and negative) will appear on the file for an individual reported as an authorized user on that account."

Affect on credit score
Credit scores are generated by taking snapshots of consumers' credit reports from each of the three major credit bureaus. When deciding whether to approve a mortgage, car or credit card loan, lenders may consider credit scores generated from one or all of the bureau reports. Some lenders may retrieve all three scores, toss out the highest and lowest scores and use the middle score. How lenders use credit scores varies based on the lender and type of loan.

As for how piggybacking can affect the authorized user's credit score, according to Craigs Watts, spokesman for FICO, the company that produces the most widely used credit scoring model, FICO, factors in all information (both negative and postive) reported by creditors when determining an individual's credit score.

"If the account has been reported as delinquent or has a high balance relative to its credit limit, the FICO scores of both users will likely be lower as a result," Watts says.

VantageScore handles it differently
The VantageScore, a less used credit scoring model developed by the three credit bureaus, handles authorized user credit scores differently.

"TransUnion's proprietary scoring models and the VantageScore do not factor authorized user accounts into the scores they generate," according to Katz. That means a young person would neither benefit from nor be penalized by their parents' credit records if lenders use the VantageScore to assess their creditworthiness.

Thus, someone who is an authorized user and is applying for a loan from a lender who pulls the Experian credit report to generate a credit score may have a higher score than if the lender used his or her TransUnion or Equifax reports to generate the scores. And, the scores may vary, depending on which scoring model the lender chooses to use.

Decline the ride: Rules of major card issuers for removing authorized users
Credit card issuer How to remove authorized users from accounts How long does it take? Who can make request?
American Express Write or call Up to 24 hours after request is received Either primary cardholder or authorized user
Bank of America Write or call Immediately Either primary cardholder or authorized user
Capital One Write or call Immediately Either primary cardholder or authorized user
Chase Write or call Immediately Either primary cardholder or authorized user
Citi Write or call Immediately Either primary cardholder or authorized user
Wells Fargo Call and then put request in writing Not final until written request is received Either primary cardholder or authorized user
To reach a credit card issuer, call the toll-free number listed on the back of the card.
Table information updated as of Jan. 4, 2010.

Back at square one
If the primary account holder's credit starts to tank, and the young adult has to request removal from the account, this could leave him or her back at square one with no credit history of his or her own. What should they do then? Credit counselors advise young adults to consider getting secured credit cards -- which may allow them to build credit histories by using money they put into an account. Instead of borrowing money from a credit card issuer to make purchases, they are borrowing and repaying their own money. Payment information on secured credit cards are often reported to the credit bureaus.

More than having a good credit score, young people need good financial habits and a keen grasp of the value of patience.

-- Craig Watts
FICO spokesman

However, because the new credit card law limits credit cards issued to people under 21, young adults won't be able to obtain these cards on their own after Feb. 22, 2010, it's unclear whether secured cards are an option.

FICO's Watts cautions young adults that there is no quick fix to good credit and building a good credit history takes time.

"The point and purpose of adding someone (or of being added) to a credit card as an authorized user or co-signer should be access to credit, not manipulation of one's credit history or credit rating," according to Watts.

"Parents can provide coaching about credit to their older children in addition to access to credit," Watts says. "More than having a good credit score, young people need good financial habits and a keen grasp of the value of patience. Cultivating those traits should be goal No. 1 for card users whether primary or authorized users. Trying to manipulate one's score without having those traits is a prescription for frustration."

Big changes on campus: Students meet credit card reform

See related: Help for bad credit, Credit card reform and you

Updated: January 5, 2010


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