“Credit piggybacking” is a term that describes an authorized user ‘piggybacking’ off the strong credit of another (normally a parent or spouse). Lately, credit repair companies/scams have started selling this ‘privilege’ to individuals with poor or marginal credit, having them piggyback off an individual with good credit (the company would pay someone with good credit a fee per account to ‘rent’ their credit). When the individual is added as an authorized user, their credit history with that account is automatically updated – presto, an overnight improvement to one’s credit score. Obviously this practice has a lot of negative implications for lenders who largely base their loan criteria upon this score. Regulators haven’t stepped in because they say that technically it isn’t illegal. Credit card companies are reticent to change their policies to limit authorized users – too profitable for them. So Fair Isaac, the behemoth of the credit scoring industry (company that developed the FICO credit score), has decided to change their scoring formula to ignore references to authorized-user accounts. So even if companies continue to report the information to the credit bureaus, it won’t impact the bottom line (your credit score).
What You Need to Know:
- TIMELINE. No one [that’s talking] knows exactly how or when this change will occur. This month, the ‘new’ scoring formula will be introduced at one of the bureaus, followed by the other two during the next year. Even then, the benefit of the authorized user won’t likely diminish overnight, as not every lender will immediately switch to the latest FICO version.
- WON'T IMPACT JOINT ACCOUNTS. The change will only impact authorized users – joint account holders will continue to both be reported.
- REACH. While this doesn’t impact the majority of people, 41 million consumers are currently listed as authorized users on accounts - pretty dramatic. Obviously the greatest impact will be the 2 million who only have information as an authorized user in their credit file – typically young people (often college students), and spouses that don’t have credit in their own names.
- BOTTOM LINE. Although it may take time for lenders to adopt the new scoring model, authorized-user accounts are no longer a reliable way to boost someone’s credit score.
Related Resources:
· Credit Issues
· Credit Scoring
· Order your Free Credit Report
Thursday, September 6, 2007
Thursday, August 30, 2007
CC Balance Transfers
Transferring debt using low-rate balance transfer offers provided by credit card companies is commonplace. As with any financial decision, there are pros and cons to consider in this matter. I don’t want to focus on weighing the merits of balance transfers. Rather, I want to address what you should look [look out] for if you’re considering this strategy as a method to get out of debt more quickly …
CONSIDERATIONS:
Look past the 0% offers. This may sound counterintuitive, but the best offers [for long-term transfers] typically are not at 0%. The 0% offers that come in abundance are typically for 6-12 months with a 16% or 18% rate to follow. Knowing the duration is normally limited, is it any surprise to hear that 86% of offers between January 2005 and September 2006 were 0% offers? Obviously this is a problem if the balance isn’t paid off by then. Most “fixed for life” transfer offers are in the 2.9% to 5.9% range. 0% fixed for life offers are out there, but are few and far between; 7.5% of the 0% offers, many of which have other catches, keep reading ...
Look at the costs. In the “good old days” finding a 0% no fee balance transfer was a piece of cake. Those days are long gone. No fee transfers are nearly extinct – in addition, many companies that traditionally charged a fee (commonly a 3% fee with a $50 or $75 maximum) have removed the maximum so that if you’re transferring $10,000 – that 3% fee would tack on $300 to the transaction (in other words, a year worth of interest in the no fee/2.9% offer).
Look at the facts. It should come as no surprise that these types of offers are marketing ploys to play with our human psychology. Obviously the company is making money or they wouldn’t do it. Smart Money has a tool on their website that will enable you to plug in the numbers related to the balance transfer to determine what it will really cost.
Talk to your current creditor. Before diving into the murky water, a suggested first step is to call your current creditor [with the offer you’re considering in hand] and ask for something comparable. Obviously they want to keep your business. This will also be much better for your credit than continually opening new accounts to ‘hop’ between.
Use only for transfer. If you decide to transfer a balance, make sure you don’t use the card for anything else (i.e., everyday purchases). According to Mintel Comperemedia (a company that monitors direct-mail solicitations), nearly ½ of balance transfer offers also include promotional rates for new purchases. Enticing? Keep in mind that any payment you make on the card will go to the smaller interest rate and the promotional rate will eventually go up. Some companies will require a certain number of purchases (often 2 or more) or a minimum dollar amount of monthly purchases (often $35+) in order to receive the special balance rate. Be cautious!
Beware the bait and switch. Beware the offers for rates “as low as” … essentially that means that if you have excellent credit we will offer you X, but if you don’t, you’ll get a much less desirable Y. Some suggest responding to transfer offers over the phone so that you can cancel the application if the terms don’t meet your liking.
Universal default. You don’t have to read far to see that doing balance transfers isn’t for the faint of heart – it’s also not for the individual that has a tendency to miss payments. Many creditors employ a ‘universal default’ strategy, meaning that a missed payment to any creditor (doesn’t have to be the card with the deal) will immediately result in the interest rate being set to the default rate – some companies will jump the rate to 30% for a single infraction … ouch!
Make sure you look before you leap. Review the Financial Tip archive as well as the credit card section of the OFS website to aid in learning about other credit card-related issues …
CONSIDERATIONS:
Look past the 0% offers. This may sound counterintuitive, but the best offers [for long-term transfers] typically are not at 0%. The 0% offers that come in abundance are typically for 6-12 months with a 16% or 18% rate to follow. Knowing the duration is normally limited, is it any surprise to hear that 86% of offers between January 2005 and September 2006 were 0% offers? Obviously this is a problem if the balance isn’t paid off by then. Most “fixed for life” transfer offers are in the 2.9% to 5.9% range. 0% fixed for life offers are out there, but are few and far between; 7.5% of the 0% offers, many of which have other catches, keep reading ...
Look at the costs. In the “good old days” finding a 0% no fee balance transfer was a piece of cake. Those days are long gone. No fee transfers are nearly extinct – in addition, many companies that traditionally charged a fee (commonly a 3% fee with a $50 or $75 maximum) have removed the maximum so that if you’re transferring $10,000 – that 3% fee would tack on $300 to the transaction (in other words, a year worth of interest in the no fee/2.9% offer).
Look at the facts. It should come as no surprise that these types of offers are marketing ploys to play with our human psychology. Obviously the company is making money or they wouldn’t do it. Smart Money has a tool on their website that will enable you to plug in the numbers related to the balance transfer to determine what it will really cost.
Talk to your current creditor. Before diving into the murky water, a suggested first step is to call your current creditor [with the offer you’re considering in hand] and ask for something comparable. Obviously they want to keep your business. This will also be much better for your credit than continually opening new accounts to ‘hop’ between.
Use only for transfer. If you decide to transfer a balance, make sure you don’t use the card for anything else (i.e., everyday purchases). According to Mintel Comperemedia (a company that monitors direct-mail solicitations), nearly ½ of balance transfer offers also include promotional rates for new purchases. Enticing? Keep in mind that any payment you make on the card will go to the smaller interest rate and the promotional rate will eventually go up. Some companies will require a certain number of purchases (often 2 or more) or a minimum dollar amount of monthly purchases (often $35+) in order to receive the special balance rate. Be cautious!
Beware the bait and switch. Beware the offers for rates “as low as” … essentially that means that if you have excellent credit we will offer you X, but if you don’t, you’ll get a much less desirable Y. Some suggest responding to transfer offers over the phone so that you can cancel the application if the terms don’t meet your liking.
Universal default. You don’t have to read far to see that doing balance transfers isn’t for the faint of heart – it’s also not for the individual that has a tendency to miss payments. Many creditors employ a ‘universal default’ strategy, meaning that a missed payment to any creditor (doesn’t have to be the card with the deal) will immediately result in the interest rate being set to the default rate – some companies will jump the rate to 30% for a single infraction … ouch!
Make sure you look before you leap. Review the Financial Tip archive as well as the credit card section of the OFS website to aid in learning about other credit card-related issues …
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