I was watching something briefly on the news, actually on several channels, that caught my attention.  The topic was called "credit piggy-backing".  The media seemed to portray it as a viable means to improve your credit and get better rates on mortgages and other loans.  It was simply amazing how the media again portrays something as a good thing, while not highlighting all of its flaws.  Where is the balanced reporting that needs to be delivered on subjects like these?

First off, in case you haven't already heard this subject, credit piggy-backing has been around for years and is simply using another person's good credit to boost yours.  While it is still legal to do this, its intent was for parents to provide their children credit to get started in life.  However, now there are even companies selling the the tactic as a service for renters and even homeowners to obtain mortgages.  They make no bones about it and say that it will cost you.

It works like this...

You have less than stellar credit and you are going to purchase a home.  Let's say that your FICO (credit score) is around 600.  Loan terms are not favorable for you at this level, so you decide that you need to get your score up.  Instead of taking several months to boost your score the "old-fashioned way", you decide you want a quick fix.  Now, you go asking your friends and family (or whoever) to see if they will be willing to put your name on their credit card or other account.  There is a catch, that credit card needs to have a good history on it or the whole thing doesn't work. 

You find one and they sign you onto the account.  You wait a month or so and that account is now reported on your credit report, potentially boosting your FICO by 40 points or more.  Now you go and purchase that home at better terms.

Again, this is a legal practice at this time, but it is may not be ethical.  It is a practice I do not encourage as it has some major potential impacts.  In fact, I do not even recommend it in relation to family members.

The issues may never come about, but you never know.  For someone who is lending their credit, there are some protections you can use, such as ensuring any cards received are destroyed.  But, what if they request a new one?  If they charge up your account, you are still responsible for paying it and it could destroy your credit.

Now, if you are the one receiving the benefit, you are still potentially facing similar issues.  What if they decide to run their account up, or even worse, stop paying it.  That will have a negative effect on your credit as well. 

As you can see, there are some major potential problems associated with this strategy.  Just the fact that both sides risk their own credit by giving up some or all control over the account(s) used.  In my opinion, it is not worth it and, though legal, is a type of fraud.

FICO has come out saying that they are going to put an end to this practice, implementing an updated version of their credit scoring system this September.  The interesting feature I did not hear on the news was that the effect from the change of the system appears to be retroactive.  That could also have some harsh effects on borrowers.

Let's say you did this and started a home loan that did not close until just after FICO updates their system.  You received very favorable loan terms, especially considering your real credit score, and are looking forward to that new home, leaving rentals behind.  Most lenders normally repull your credit just prior to closing so guess what, your score just went back to the old number and you no longer qualify.  Your dreams have just been shattered and you may even lose your deposit on top of that.

Don't get me wrong.  I am in favor of improving credit scores, but I am only in favor of legitimate and ethical ways of doing so.  I help my clients improve their scores by reviewing their credit, finding erroneous information that could legitimately be removed and creating plans to improve their scores to obtain better financing.  The only problem is that it takes a few months.