Credit Where None is Due? Authorized User Account Status and Piggybacking Credit

32 Pages Posted: 31 Mar 2010 Last revised: 3 May 2010

See all articles by Robert B. Avery

Robert B. Avery

Board of Governors of the Federal Reserve System - Financial Studies Section

Kenneth P. Brevoort

Independent

Glenn B. Canner

Board of Governors of the Federal Reserve System - Division of Research and Statistics

Date Written: March 5, 2010

Abstract

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.

Keywords: credit scoring, authorized users, Regulation B, Equal Credit Opportunity Act, piggybacking credit

JEL Classification: G21, G28, K20, L51

Suggested Citation

Avery, Robert B. and Brevoort, Kenneth and Canner, Glenn B., Credit Where None is Due? Authorized User Account Status and Piggybacking Credit (March 5, 2010). FEDS Working Paper No. 2010-23. Available at SSRN: https://ssrn.com/abstract=1580175

Robert B. Avery

Board of Governors of the Federal Reserve System - Financial Studies Section ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2906 (Phone)
202-452-5295 (Fax)

Kenneth Brevoort (Contact Author)

Independent

No Address Available

Glenn B. Canner

Board of Governors of the Federal Reserve System - Division of Research and Statistics ( email )

20th and C Streets, NW
Mailstop 153
Washington, DC 20551
United States

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