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A tradeline is an entry that appears on your credit report when a consumer opens a new credit account. Experian, Equifax, and TransUnion are the three primary credit reporting bureaus.
Each credit account has a tradeline. Tradeline legality usually applies to the controversial practice of “buying” or “renting” them.
How Buying Tradelines Works
The process of buying or renting tradelines is usually facilitated by third-party organizations. The “piggybacking” process appeals to consumers seeking quick ways of improving their credit. Here, paying consumers become authorized users on someone’s credit card account.
Acting as a broker, third-party organizations pay consumers with active credit card accounts. Lenders report authorized users to credit bureaus, which generates a tradeline.
Traditionally, authorized user tradelines involved parents adding children or one spouse adding another.
Authorized user arrangements are distinct from two consumers having a joint account. In a joint account, both parties are liable for complying with the credit agreement.
Authorized users are only eligible for making purchases with the credit card. Legally, they assume no responsibility for ensuring any balance is repaid.
Is It Legal To Buy Tradelines?
Buying tradelines to build credit is not currently illegal…yet. It is often frowned upon by the bureaus. In 1974, The Federal Reserve’s Regulation B implemented a reporting requirement for any spouse added to a cardholder account.
This rule allowed lenders access to the authorized user’s credit history if they choose.
FICO is the developer of the largest credit scoring model. FICO acknowledged how piggybacking might boost credit scores of potential authorized users without merit. When FICO launched its Score 8 model, it included a form of piggybacking detection.
Experian explained why purchasing tradelines represents an illegitimate practice. First, the authorized user pays the cardholder for allowing them account access. Second, most purchasing arrangements involve individuals that have never even met.
Further, Experian explained how buying tradelines deceive lenders and may constitute bank fraud. This may result from consumers misrepresenting themselves to potential lenders–manipulating their creditworthiness.
How Tradelines Affect Your Credit Score
Credit scores are three-digit numbers that reflect a consumer’s credit “rating” in a range from 350 to 800. The calculation process involves evaluating a consumer’s credit history based on tradelines.
In the absence of tradelines, a consumer would lack any basis for calculating a credit score. Credit scoring models require at least one credit account that is active for six months.
Defining the types of tradelines and the factors involved in calculating credit scores are important for a more complete understanding. The two primary tradelines are revolving credit accounts and installment credit accounts.
The most common example of revolving credit accounts are credit cards. Credit card accounts allow ongoing purchases and flexible repayment options within credit limits.
The common types of installment accounts include auto loans and student loans. Installment loans feature a largely pre-determined set of terms. The borrower receives a lump sum, which is then repaid over a defined number of monthly payments.
FICO considers the following five primary factors when calculating your credit score:
- Payment History (35%): Consistently making timely payments is the largest single consideration.
- Amounts Owed (30%): How much overall debt a borrower has and (particularly) the credit utilization rate on revolving accounts. The utilization rate = current credit card account balance / maximum limit. Utilization rates should remain under 30%.
- Length of Credit History (15%): Considers the age of your credit profile.
- Credit Mix (10%): Lenders prefer that consumers prove their creditworthiness using a “mix” of both revolving and installment accounts.
- New Credit (10%): Applying for or opening multiple new credit accounts are “red flags.”
Can Tradelines Hurt Your Credit?
Tradelines are the components that make up your overall credit score. Tradeline accounts containing negative information will have an adverse effect on your credit.
Using the FICO scoring model, your payment history is the single largest factor (35%). Failing to make payments on time will hinder your score.
For example, those with good credit who have a payment over 30 days late may notice as much as a 100-point drop. Federal laws require lenders to wait at least 30 days until they report late payments.
Another possible concern exists for tradelines where consumers are only authorized users. What if a cardholder closes their account or removes you as an authorized user? Those lacking any other current tradelines may face major concerns.
The removal of a credit card tradeline might also hurt your credit utilization rate. Consider the following example:
Assume you have two credit cards, each with a $1,000 limit. Card A has a $500 balance and Card B has a $0 balance. Assume the cardholder removes you as an authorized user from Card B.
Current Utilization Rate: $500 / $2000 = 25%
New Utilization Rate: $500 / $1000 = 50% (well over the recommended 30% threshold)
If a cardholder removed you as an authorized user, it could also harm your credit mix. This may occur if the removed tradeline was the only revolving type of account on the credit report.
How Much Does Buying A Tradeline Cost?
Several websites now actively sell tradelines to U.S. consumers. Most advertised tradelines add prospective consumers to active cardholder accounts as authorized users. Some of the average, general price ranges for a tradeline are $150 to $4,000.
The two primary variables that influence pricing are the age and the credit limit of the account. The age of credit accounts has approximately a 15% influence on your FICO score.
This includes when the account opened, the average age of all accounts, and the age of the newest account.
Prices for “younger” accounts appear in the $200 range. “Seasoned” tradelines are typically those more than two years old. Accounts with higher credit limits also have premium pricing.
Credit utilization rates are also important. Thus, accounts with high limits and low balances are quite costly.
Consumers who rent their current home also may buy rental tradelines. Sites including BoomPay.com will contact your landlord and verify your rental information.
For example, a $30 enrollment fee includes up to two years of rental history reported to Equifax and TransUnion. (Experian not available.)
This rental tradeline option is an example of a primary tradeline. These are accounts in the actual consumer’s name.
The Experian BOOSTTM program is a free tradeline option. The program allows for credit bureau reporting of utility bills, rent, and others.
There are better ways to improve your credit than through buying a tradeline that are far less risky.
Alternatives To Buying Tradelines
Consider some of the alternatives to buying tradelines. Many of these are more cost-effective options and potentially more impactful.
Get a Credit Builder Loan
A credit-builder loan is a good option for a consumer who wants to establish or improve their credit. Most credit-builder loans will also help to build savings.
Many local credit unions, community banks, and online lenders now issue these loans.
Payment history is the largest single factor that contributes to a FICO score. These loans are a type of installment loan that can create a positive payment history.
Once approved for the loan, the “borrowed” funds are then deposited and secured in an account. Many credit-builder loans range between $300 and $1,000 and have a repayment term of six to 24 months.
During the loan term, the lender should report activity to all three credit bureaus. Making all payments on-time is critical for enhancing your credit.
After making all your payments, the funds held in the savings account will then become available.
Get a Secured Credit Card
Obtaining a secured credit card is an option for consumers to build or improve their credit.
Secured credit cards often have a credit limit ranging from $200 to $300 or more. The credit limit is usually the same amount as a security deposit required for approval.
Making purchases using a secured card appears no different from an unsecured card. For example, you would swipe the card at a terminal within a retailer or use it for online purchases.
Over a period of months or years, the consumer should use the card and repay the amounts on time. The goal should be to receive a refund of your security deposit and qualify for an unsecured card.
Those considering a secured credit card should carefully read all terms and conditions. Be sure to compare several cards because many card issuers impose exorbitant fees and charges.
Report Your Rent Payments to the Credit Bureaus
All three major credit bureaus now will add your rent payment history to your credit report. Rent reporting services may impose enrollment or setup fees, monthly fees, etc.
Extra fees often apply to past rental histories also. For example, BoomPay will report up to the past 24 months of rent payment history for a $25 fee.
The FICO Score 9 model now considers reported rental payments when calculating scores. According to Experian, roughly 75% of those who report rental payments experience a credit score increase of at least 11 points.
Be sure to check with your landlord or property manager to see if they already have a reporting service. Also, confirm that all three credit bureaus will receive the rental payment information.
Buying tradelines for improving your credit score is technically legal. Yet the process is deceptive and has other potential drawbacks.
For example, buying tradelines commonly costs hundreds of dollars (or more). Keep in mind that the primary cardholder could miss a payment and potentially hurt your credit score in the process.
Consumers should consider various alternatives available for establishing and building their credit. Some of the options include credit-builder loans, secured credit cards, and rent reporting.
Anthony Amodeo is a regular finance writer in both business-to-business and business-to-consumer industries. Particular areas of focus include personal finance, small business, real estate, and more. He is a graduate of Kent State University. His credit scores are top tier.