With just a click of a mouse or a touch of a screen, technology has put the world at our fingertips. Not too long ago, the technology revolution even marched its way into instant credit improvement. For a large fee per account, an individual with a bad or nonexistent credit history could immediately be added to the account of a stranger with a good credit history, helping to boost the score of the high-risk borrower. Now the high-risk borrower appears to be a far better credit risk than they actually are. This is a far cry from the traditional authorized user strategy that families and spouses have been using for years.
It was an easy fix for those who needed it, but just recently, Fair Isaac Corporation, the early developer of the credit report and scoring system, determined that they will no longer allow credit points that come from "piggybacking" on another person's credit score. Their key decision deals a knockout blow to consumers and lenders who rely on instant credit building to boost scores for a home purchase or refi.
A Little Background
The instant credit building industry exploded in popularity as homeowners and buyers scurried to wriggle free from the subprime mortgage fallout. Individuals with good credit made instant cash by "renting out" their credit lines to those with inferior credit.
Fair Isaac has unceremoniously pulled the plug on allowing the inclusion of any credit history that relies on the credit histories of any parties beyond those being considered. The ruling also applies to parents who want to help their children establish a stellar credit history by hitching a ride on their parents' good credit.
I have never been a proponent of this new instant credit-building approach of buying a stranger's credit history, and I have viewed it as a Band-Aid approach, at best. I have always been a supporter of the traditional concept of the basics of credit education and improvement.
Piggybacking can be a bad idea, and here are the reasons why:
- It's potentially dangerous.
When you become an authorized user on someone else's card, you do so because you are in desperate need of a credit boost. But what will happen to your credit if the owner of that credit has a late pay or runs up a huge balance? That will sabotage your score, and it is completely out of your control. Just as their good score can boost yours, their subsequent recklessness can sink you deeper than ever – and it's just not worth the risk.
- It's unnecessarily expensive.
Under this new scam, piggybacking on someone else's credit requires that you pay a percentage of the credit limit of the card. People could pay thousands based on the limit. However, we all know that this makes no sense because the dollar amount of the credit limit does not factor into the scoring system. Rather, it's the percentage ratio between the balance and the limit. It's important to keep your balances below 30% of their limit when trying to improve your credit score, and under 50% when trying to maintain.
A Superior Alternative
There is a far better alternative to piggybacking credit that you can put into action right now. That alternative is a secured credit card account. (Note: A secured credit card means that you put up your own money as collateral. The amount of the limit does not matter to the scoring system, only that you use it and pay it on time.)
The only real difference between piggybacking and secured cards is that those who use the piggybacking approach will have an instant credit history of a few years or even more. Don't let this stand in your way of getting the secured card, however. While you do not have an instant credit history with it, you do establish a credit rating. The length of credit history is ONLY a part of the 15% that makes up a credit score.
Secured credit cards are helpful to new credit users, those who have filed bankruptcy, or for those who have closed all of their credit cards. Secured cards are beneficial when you have credit challenges because they enable you to have active tradelines. Remember, 30% of your credit score is made up of how you use and manage your credit card debt, so you MUST have active credit card tradelines to maximize your credit score.
Secured credit cards can have a wonderful impact on lower scores. In fact, I have seen scores increase by as much as 50+ points in the first two months when a client implements and uses a secured account. For new credit users, a score can be generated in 3-6 months.
There are hundreds of secured credit card companies on the web, but the ones to look for are the type of accounts offered by Orchard Bank. Orchard guarantees to report to all three credit bureaus every 30 days, which is important to improving your scores quickly.
If you would like to obtain a list of credit card companies who work with less than perfect credit, you may do so here.
Kids and Credit
One unfortunate fallout of Fair Isaac's crackdown on authorized users is that it makes it tougher for kids to establish credit. It used to be that kids and spouses could establish credit by becoming an authorized user on a spousal or parental account. The credit-selling scam ruined that opportunity, especially for students who are trying to build credit. The secured credit card is a perfect alternative. An equally-inviting opportunity for students is one of the many student credit cards offered. Click here for a list of companies that offer cards for students.
Long-term Credit Improvement is Easier Than You Think
If your credit score is lower than you would like, you can improve both your score and your credit for good. Improved credit management is not complicated. In fact, it's really quite simple.
Everyone can better their credit score by taking exacting and specific steps, and although it doesn't happen overnight, generally speaking, it takes 3-6 months for lasting credit improvement to start taking place. With that, it's time to get serious and to get started.
Simple Steps to Credit Improvement:
While Fair Isaac's crackdown on the piggybacking of credit may feel like an obstacle in your path to credit score improvement, don't get discouraged. There are specific ways to establish and improve credit that don't involve risky schemes and elaborate shell games. The bottom line is that you don't need to play games to boost your credit score. Real credit history and credit improvement is within your reach. Simply follow the steps I have given you, and you will go a long way toward improving your score – for good!
- Start with the basics.
Order all three of your credit reports and all three of your credit scores. You are entitled under the law to a free copy of your credit report from all three credit bureaus each year when you order it from Annual Credit Report Request Service. To order, visit www.annualcreditreport.com, call toll-free 877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
You will have to pay an additional fee for the credit score from each bureau. Scan your report for any errors. Is there an account on there that you didn't apply for? Is there a company reporting a debt that is inaccurate? Are all of your credit card limits reporting? Are your balances up-to-date? Are your name, birth date and Social Security number correct?
If there are any errors on your report, no matter how small, they can lead to big problems. Not only can they inhibit you from obtaining credit, they can also keep you from getting the interest rate you deserve on your mortgage or refinance.
- Start improving what you can immediately.
Late payments and delinquent accounts will affect your score negatively, so take care of them – the sooner, the better. If you have a good relationship with your creditor, call them to see if they'll work with you on removing a late payment. They do it all the time.
If you have past due accounts, call your creditors to see if you can negotiate a better interest rate, lower payments, or make other arrangements to pay off your debt sooner. Also, don't carry high balances on your credit cards. If you carry more than 50% of your limit every month, this reflects negatively in your score.
- Dispute errors on your report.
Errors can appear on your credit report. These could be human error in reporting information from a creditor or one of the credit bureaus. They could even be unauthorized accounts set up in your name by an identity thief. Before you apply for a loan, you should verify the information in your credit report. If you find errors, you should correct them immediately.
Here are the 5 rules in sending dispute letters to the credit bureaus:
Rule 1: Make sure that you only send the letter to the bureau(s) that is reporting the derogatory information. Not all creditors report to all bureaus. If you send a dispute letter to one of the three bureaus that is NOT reporting the information, you take the risk of having the derogatory information added to that bureau, and your score will go down.
Rule 2: Make sure that you send everything certified so that you can prove delivery.
Rule 3: Include copies of any supporting documentation you may have to verify your claim.
Rule 4: Keeping a log of activities is very important for successful credit repair. Click here to obtain a sample log you can use.
Rule 5: Mail any disputes to the bureaus at their different addresses. Each bureau has several addresses. If your first dispute comes back without change, send it to another address for that bureau. You may obtain a list of credit bureau addresses here.
- If you feel that the credit challenges you are facing are too much, or if you don't have the time or stamina to do the homework necessary to get the ball rolling, then it's time to consider using a professional service to help you reach your goals. I recommend that you reach out to the professional who gave you the subscription to YOU Magazine and have a frank conversation about what the next step should be on your path to good credit.