Credit history ‘piggybacking’ becoming harder

Boosting your credit score by "piggybacking" on someone else's good credit is about to get much more difficult.

People have long added their children, relatives or friends to their credit accounts as "authorized users" as a way to help them establish a record of responsible credit use. But Fair Isaac, whose FICO credit-scoring formula is widely used by lenders to determine borrowers' creditworthiness, cites widespread abuse by credit repair companies that serve as the middleman between people with poor credit and strangers willing to "rent" their strong credit history.

In response, Fair Isaac's new FICO 08 formula, currently being adopted by the three major credit bureaus (Equifax, Experian and TransUnion), will no longer recognize someone's history as an authorized user on other people's credit accounts.

As a result, some people's scores may drop, prompting higher interest rates and more difficulty in securing credit cards, mortgages and other loans. And anyone recently divorced or widowed – particularly women – will learn the hard way that they haven't accumulated sufficient individual credit history, even though they may have been authorized users for some time.

So what can you do? Here are a few suggestions:

If you're an authorized user on your spouse's credit accounts, consider converting them to joint accounts. Just bear in mind that joint accounts are potentially risky because one party could run up the balance or default on payments, so think carefully before taking this step, particularly with someone outside your immediate family.

Your credit may be good enough to open your own credit card account – if not through a bank, then with a department store or gas company. While these accounts are easier to obtain, be careful because they usually have higher interest rates. Use the card modestly and try to pay off the balance each month – that will help you build a credit history without accumulating debt.

You can also apply for a secured credit card, which is backed by a deposit account you open with the issuing financial institution. Typically, the maximum amount you can charge is limited to the amount on deposit. Some secured cards will convert to unsecured (i.e., regular) credit cards after you've made several on-time payments.

When shopping for secured cards, look for zero or low annual fees, no application fees and low interest rates. Verify that the lender reports your payment history to all three credit bureaus, since that's the whole point of opening a secured card account. Credit unions can often offer good rates or go to www.bankrate.com to compare rates and terms between different secured and unsecured credit cards (also a good source for checking and savings accounts, auto loans, mortgages, etc.)

Another good resource for tips on how to establish a sound credit history is What's My Score, a financial literacy program run by Visa Inc., whose goal is to raise awareness of the importance of understanding and improving credit scores (www.WhatsMyScore.com). Although primarily geared toward college students, the site's information is helpful for any age. As always, consult a financial professional regarding your particular situation.

Building a strong personal credit history can be a long, painstaking process. Learn what you need to do now so you won't be caught off guard later on when you need good credit the most.