'Piggybacking' All The Way to the Bank
A little known but growing practice that artificially raises credit scores virtually overnight has mortgage bankers sweating bullets and they are working hard to stop it in its tracks.
The higher your credit score is the easier it is for you to get a home loan. With excellent credit you can have lenders compete for your business and be assured that you are getting the lowest possible interest rate. That's why before applying for a mortgage it's a good idea to take a look at your credit report yourself and make sure there is no negative, and potentially costly, information reported on it.
But what if your credit is not so good? Late payments, divorce and identity theft can quickly wreck your credit score. It can take years to repair the damage. In the meantime if you need a home loan you could fall victim to predatory lenders or be forced into a bad mortgage loan with a subprime lender which can lead to foreclosure if you can't keep up with the high payments.
New services have popped up allowing their customers to 'piggyback' the credit scores of consumers with long-term outstanding credit. For a fee, you can effectively rent a good credit score in order to get a mortgage loan or other credit account established.
How does this work? Well, the root of it goes way back to 1974 when the Equal Credit Opportunity Act (ECOA) was passed. In an effort to help wives who didn't work outside the home establish credit in their own names the ECOA allowed that creditors could report account activity on the credit report of a spouse who is an authorized user of the account. Later the law changed to allow creditors to report account activity on the credit reports of any authorized user of the account.
So entrepreneurs have gotten crafty with this idea. They have developed networks of people with excellent credit scores who will accept cash in exchange for adding authorized users to their long standing credit card accounts. There's no risk to the account holder because they never release their account information or spare card to the person who is "renting" their credit score. Then the shrewd business people find people who need their credit scores improved quickly and are willing to pay for the "service". They have been improving credit scores for their customers virtually overnight by using this undetectable method.
Mortgage bankers are understandably nervous about this practice. Since they can't tell who really has good credit and who doesn't anymore, they may be giving their best loans to people who can't pay. How often does someone with stellar credit end up in foreclosure? Not often, but when there is a price tag on an excellent credit score, anyone who can come up with the money to rent good credit can get a mortgage loan. Even those people who won't be able to repay the loan and will eventually end up in foreclosure can get a mortgage loan with this practice.
Changes are in the works with the credit reporting agencies. There is no quick-fix to weeding out the credit renters and determining the true credit worthiness of an individual, but they are working on it. In the process there may be casualties. The people EOCA originally intended to help build solid credit won't be able to go the "authorized user" route any longer. Within approximately two years it is estimated that all of the credit bureaus will have wiped out scoring based on authorized users and the 'piggyback' brokers will be out of business.