Credit Where None is Due?
Authorized User Account Status and "Piggybacking Credit"
An "authorized user" is a person who is permitted by a revolving account holder to use an account without being legally liable for any charges incurred. The Federal Reserve's Regulation B, which implements the 1974 Equal Credit Opportunity Act, requires that information on spousal authorized user accounts be reported to the credit bureaus and considered when lenders evaluate credit history. Since creditors generally furnish to the credit bureaus information on all authorized user accounts, without indicating which are spouses and which are not, credit scoring modelers cannot distinguish spousal from non-spousal authorized user accounts. This effectively requires that all authorized user accounts receive similar treatment.
Consequently, becoming an authorized user on an old account with a good payment history, may improve an individual's credit score, potentially increasing access to credit or reducing borrowing costs. As a result, the practice of "piggybacking credit" has developed. In a piggybacking arrangement, an individual pays a fee to be added as an authorized user on an account to "rent" the account's credit history. This paper provides the first comprehensive look at authorized user accounts in individual credit records and how their importance differs across demographic groups. Our analysis suggests that piggybacking credit can materially improve credit scores, particularly for individuals with thin or short credit histories. We also evaluate the effect that eliminating authorized user accounts from credit scoring models would have on individual credit scores. Our results suggest that removing this information has relatively little effect on credit scores, but may reduce model predictiveness.
When an authorized user on an account is the spouse of an account holder, the Federal Reserve Board's Regulation B ("Reg. B"), which implements the 1974 Equal Credit Opportunity Act (ECOA), imposes two important requirements on creditors. First, when providing information to the credit bureaus, creditors are required to furnish information for the authorized user as well as for the account holders. Second, when using credit history to assess the creditworthiness of applicants, creditors are required to consider, when available, the history of accounts held by the applicant's spouse on which the applicant is an authorized user (as well as those accounts that are jointly held).2 These requirements have been in place since Reg. B's inception in 1975.
In promulgating these provisions of Reg. B, the Federal Reserve Board pointed to complaints received from women who were unable to obtain credit because information on accounts jointly held with their husbands was reported to the credit bureaus in the husband's name alone. Additionally, the Board took the view that, since some state laws hold one spouse liable for debts incurred by the other, a spouse should have the "benefit or burden" of the credit history of their spouse's accounts that they were authorized to use. Further motivation was provided by the significant role that spousal authorized users were found to play in the maintenance of an account, such that the payment history on an account was often "as much the product of the user's contribution as that of the obligor."3
Beginning in 2007, companies began to emerge to help borrowers with poor credit histories piggyback on the good credit history of others. Individuals pay a fee to these companies to locate an account holder who is willing to add this person to their account in exchange for a portion of the fee.5 The person added to the account is an authorized user in name only, as the individual receives neither the account number nor an access device (such as a credit card) and consequently cannot use the account for purchases.6 By piggybacking on someone else's account history, however, an authorized user may be able to improve their credit score in advance of a credit application, potentially resulting in lower borrowing costs or an ability to qualify for credit that otherwise would not be extended.
The practice of piggybacking credit has raised concerns that the credit scores of people with authorized user accounts may not accurately reflect their creditworthiness. For example, a study by Fitch Ratings (Pendley, Costello, and Kelsch, 2007) of mortgage defaults points to the presence of authorized user accounts on the credit records of high-FICO borrowers who defaulted on their loans as evidence of poor underwriting practice by the lender. In response to concerns about the role of authorized user accounts in credit scores, Fair Isaac, which has traditionally treated authorized users and account holders identically, has revised the FICO credit scoring model to place less weight on those accounts on which an individual is an authorized user. Despite these concerns, very little is known about the role played by authorized user accounts in credit history files and, to date, the Federal Trade Commission has not taken action against companies that offer piggybacking arrangements.