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If you're considering ways to build your credit to get a mortgage, you may be looking at piggybacking credit, or becoming an authorized user on another person's credit card account. But credit piggybacking is unlikely to help you qualify for a mortgage.
How Piggybacking Credit Works
People who are new to credit or have a less-than-favorable credit score may have trouble getting credit card accounts on their own because their credit scores are too low, or because they don't even have a credit report from which a credit score can be calculated. One way they can gain access to a credit card is by becoming an authorized user on an established credit card account, sometimes referred to as "piggybacking."
Because most, but not all, credit card companies report the authorized user's purchases and payments to the three national credit bureaus (Experian, Equifax and TransUnion), authorized users can establish a pattern of credit usage that may help them build up their credit over time. As long as the primary user doesn't miss payments or carry excessive balances, the authorized user can establish a credit history even if they don't use any credit themselves. However, this strategy won't help authorized users learn good credit habits or how to create their own solid credit history over time.
This practice has given rise to third-party companies that, for fees often in the thousands of dollars, will make you an authorized user on someone else's credit card account for a short period of time (without actually issuing you a card) as a means of artificially boosting your credit scores.
Paying for this type of service is highly questionable and can cause many more problems than it's worth. The number of lenders reporting primary-user activity on authorized users' credit reports is shrinking, and the latest versions of the FICO® Score☉ and VantageScore® credit scoring systems take steps to downplay the impact of certain authorized-user accounts in an attempt to discourage this practice. In certain instances, using a for-profit piggybacking service could be interpreted as bank fraud.
Understanding the Mortgage Process
When you apply for a mortgage, the lender's first step in deciding whether to provide you with a loan is often reviewing your credit score—but it's never the only step in their lending decision.
While lenders regard strong credit scores as a good indicator of reliable payment habits, they look well beyond your score when considering your loan application. Mortgage lenders typically look carefully at the credit reports used as the basis for your credit scores, and they almost always seek additional information about your income, length of employment, and perhaps even savings and other assets you could draw upon to help pay back the loan.
How Mortgage Lenders View Credit Piggybacking
Each lender has its own specific criteria for deciding whom it will lend to and how much it charges a given borrower in terms of interest rate and fees. Lenders often use credit scores as "first pass" indicators of the types of loan they'll offer you. If your FICO® Score falls in the good range, for instance, your application might be sorted into consideration for a relatively low interest loan, while a score in the fair range might steer your application toward consideration for a loan with a higher interest rate, or even a subprime loan.
Those preliminary categorizations can go right out the window once the lender reviews your credit report. Once again, the criteria vary, but lenders seeking evidence of strong credit management typically like to see at least two or three credit accounts in your name, ideally in a mix of revolving accounts (such as credit cards) and installment loans (such as car loans).
Because authorized-user accounts are not ultimately your responsibility, some lenders ignore them for purposes of evaluating creditworthiness. That means a credit score built solely using piggybacked accounts could be setting you up for disappointment: You might be offered promotions for loans with attractive interest rates based on a score buoyed by authorized-user activity only to have those offers withdrawn or downgraded upon closer examination of your credit report.
How to Build Credit Over Time
Becoming an authorized user may be a good first step to building credit, but you should only use this strategy with a close relative or person you trust. While you are not responsible for making the payments on this account, using the card and paying the primary user for your purchases may help you establish good credit habits.
Once you've used an authorized-user account to establish payment history, you may be eligible for a credit card in your own name. It will probably have a higher interest rate and a lower borrowing limit than you'd have on an authorized-user account, but it'll be a start toward building credit of your own.
Use your credit card regularly even if only for small purchases. Keep your balance at or below about 30% of the borrowing limit and pay the bills promptly each month. In time, you'll be in good shape to apply for another card, perhaps with a lower interest rate and a higher borrowing limit. You may also find yourself better qualified for an auto loan.
By establishing additional credit accounts such as these, you'll likely improve your credit scores by as much or more than you could by solely being an authorized user—and you'll also be building the kind of credit management track record lenders look for when considering mortgage applications.
This approach to building a credit history that'll help you get a mortgage is time-tested, but it also takes time: You'll need at least several years if you're starting from scratch with no credit history at all, and perhaps even longer if you're trying to rebuild your credit after a financial mishap.
If you don't feel you can wait, you may be eligible for some mortgage loan options even if your credit is less than great, but you should be aware that they can be hard to get, and expensive in terms of interest and fees if you do qualify.
Improve Your Credit Before Getting a Mortgage
If you can wait even a few months to a year, you can do a great deal to boost your odds of mortgage approval and generally spruce up your credit by following some basic guidelines for improving your credit scores. In a nutshell, they boil down to:
- Pay your bills on time every month.
- Pay down credit card balances in excess of 30% of your borrowing limits.
- Monitor your credit scores and check your credit report, and correct any inaccurate entries they may contain.
Whenever you decide the time is right to seek a mortgage, you should take a few steps to make sure you put your best foot forward as you submit your applications, and make sure to apply to multiple lenders to ensure you get the best possible borrowing terms.
Becoming an authorized user on credit accounts may help you establish and improve your credit scores, which can be a good first step on the way to a mortgage loan. But don't count on piggybacking by itself to get you the home loan you seek.