Boost Your Credit: A Guide to “Credit Piggybacking” for Small Business Owners
Credit Piggybacking
Introduction
For small business owners, maintaining a strong credit score is crucial for securing favorable financing options. One effective strategy to improve your credit score is credit piggybacking. This involves becoming an authorized user on someone else's credit account, allowing you to benefit from their positive credit history. In this guide, we'll explore how credit piggybacking works, its benefits and risks, and how you can leverage it to enhance your credit profile.
Understanding Credit Piggybacking
What Is Credit Piggybacking?
Credit piggybacking refers to the practice of being added as an authorized user on another person's credit account. This allows the authorized user to benefit from the primary account holder's positive credit history, potentially improving their own credit score. It's important to note that the authorized user does not have to use the credit card or account to gain these benefits.
How Does It Work?
When you're added as an authorized user, the account's history—including payment history, credit limit, and account age—may be reported on your credit report. If the primary account holder has a strong credit history, this can positively impact your credit score. However, if the account has negative marks, it could harm your credit instead.
Benefits of Credit Piggybacking
Accelerated Credit Building
For individuals with limited or no credit history, piggybacking can provide a quick way to establish a credit profile. By associating with a well-managed account, you can demonstrate responsible credit behavior to lenders.
Improved Credit Score
A positive account can contribute to a higher credit score, which is beneficial when applying for loans or credit cards. A better credit score can lead to lower interest rates and better loan terms.
Risks and Considerations
Potential Negative Impact
If the primary account holder misses payments or carries high balances, these negative factors can appear on your credit report as well. It's crucial to ensure that the account is in good standing before becoming an authorized user.
Limited Control
As an authorized user, you have no control over the account's management. Any changes made by the primary account holder can affect your credit without your input.
Implementing Credit Piggybacking
Choosing the Right Account
Select an account with a long history of on-time payments, low credit utilization, and a high credit limit. Ensure that the credit issuer reports authorized user activity to the credit bureaus.
Communicating with the Account Holder
Discuss expectations and responsibilities with the primary account holder. Clarify that you don't need access to the physical card to benefit from the account's history.
Alternatives to Credit Piggybacking
Secured Credit Cards
Secured credit cards require a deposit that serves as your credit limit. They are a good option for building or rebuilding credit.
Credit Builder Loans
These loans are designed to help individuals build credit. The borrowed funds are held in an account while you make payments, and once the loan is paid off, the funds are released to you.
Quick Takeaways
Credit piggybacking can be an effective way to improve your credit score.
Ensure the primary account is in good standing before becoming an authorized user.
Communicate clearly with the account holder about expectations.
Consider alternatives like secured credit cards or credit builder loans if piggybacking isn't suitable.
Regularly monitor your credit report to track changes and address any issues promptly.
Conclusion
Credit piggybacking offers a viable path for small business owners to enhance their credit profiles, especially when traditional credit-building methods are challenging. By carefully selecting the right account and maintaining open communication with the primary account holder, you can leverage this strategy to improve your credit score. Always weigh the benefits against the potential risks, and consider alternative options if necessary.
If you haven’t yet, be sure to check out our guide to building business credit. It’s a short guide that gives you tips and tricks to boost your business credit as well as your personal credit.
Frequently Asked Questions
Q1: How long does it take to see improvements in my credit score through piggybacking?
A1: Improvements can appear within one to two billing cycles after being added as an authorized user, depending on when the credit issuer reports to the bureaus.
Q2: Can I be removed as an authorized user if the account starts to negatively impact my credit?
A2: Yes, you can request to be removed at any time. Once removed, the account's history may eventually fall off your credit report.
Q3: Does piggybacking affect my ability to get my own credit card or loan?
A3: It can positively influence your credit score, potentially making it easier to qualify for credit. However, lenders also consider other factors like income and existing debts.
Q4: Is there a cost associated with becoming an authorized user?
A4: Typically, there is no fee to become an authorized user, but some credit repair companies may charge for this service.
Q5: Will I be responsible for the debt on the account as an authorized user?
A5: Generally, authorized users are not legally responsible for the debt. However, it's essential to confirm this with the credit issuer.
References
Experian. "What Is Credit Card Piggybacking?"
NerdWallet. "Credit Piggybacking: Can It Help Your Credit