Katalepsis

Remember when you were just starting out on your own as a young adult? If your parents were anything like mine, they wanted you to have a good financial foundation before shoving you out the door. That foundation requires a relationship with a bank. While I have had a savings account ever since I was a child, I didn’t get a checking account until high school.

By the time I entered college, it was time for me to get a credit card. The only problem is that I had absolutely no credit history. In order to qualify for a decent college card, my father marched me down to the bank and allowed me to “piggyback” on his own credit to qualify for a larger credit line and better rates. “Piggybacking” refers to the process by which someone with excellent credit (my father) places an authorized user with no credit (his son) on one of his or her cards. The effect of such a move is that my own credit score benefits from my father’s impeccable payment and credit history. Instantly, I was able to get a much larger opening line of credit and a better interest rate. It pays to have nice parents.

But currently there is a piggybacking epidemic occurring. Some geniuses got the idea to sell good credit histories on the open market. Here’s how it works. Suppose I am someone with a low credit score (580). What I need is for someone with good credit to sign me up as an authorized user of one of their lines of credit. Given my low score, I may not have any friends and family who are willing to take me on board. Where should I turn? An internet business of course! By spending a lot of money (usually around $1000), I can pay a perfect stranger with excellent credit to place me on one of their cards. By using a middleman company, the transaction is kept private and there is “supposedly” no danger for either party. The person with tarnished credit does not have the necessary information to access the line of credit, and the person with excellent credit can have the user removed from their card after a few months–the time it takes for the other person to benefit from the credit history.

What interests me about the debate is the firestorm of blogging/commentary activity on the web regarding the issue. People seem to be concerned about the “ethics” of the practice. There are proponents on both sides of the issue:

Pro-Piggybacking: Those who support the practice (surprise, surprise) are generally the ones who engage in it. These individuals are either hoping to inflate their own credit scores in order to repair their credit or they are hoping to make a quick buck by lending out their good name. The main argument they wield is that the practice is “legal” because the credit card companies allow for several authorized users to be added to accounts. While initially this practice was created to allow spouses, children, and family members have access to credit, pro-piggybackers claim that there is no law that says one can’t add a perfect stranger for a price. Given that it is not against the law, the practice is perfectly legal.

Anti-Piggybacking: Those who are against the practice (surprise, surprise) are generally creditors who claim that the practice is fraudulent. Despite the fact that there is a loophole in the system, those who sell their credit histories are willfully helping to falsely inflate the poor credit scores of others in an attempt to deceive lenders. Fraud is against the law; hence, the practice is illegal.

To my eyes, there is a lot of confusion in the debate that centers around two issues. First, there is a distinction between the letter of the law and the spirit of the law. Second, we must distinguish between what is lawful and unlawful from what is morally right and morally wrong.

Those who argue for piggy-backing generally appeal to the fact that the law does not directly prohibit their practice. That may be true. It looks like the laws related to the practice do not specifically address the practice. For now, it looks like the letter of the law is on their side. But those who argue against the practice say that the spirit of the law is much different. The whole practice of adding authorized users to accounts was supposed to allow family and friends to gain access to credit. Making the move to deliberately sell one’s credit history on the open market, while not violating the practice per se, certainly violates the spirit of the practice.

To that end, the question of the “ethics” of the practice get tainted by a failure to make a distinction between law and morality. The question of whether the practice is ethical within the bounds of the law is still open to question. I’m sure that some courts will decide the issue sometime soon. But the result of that debate does not even begin to touch the real ethical debate. Regardless of the law, is the practice an ethical one in the strong sense? I don’t see how one can defend it. The practice involves exploiting a loophole in order to deceive lenders into authorizing people who have bad credit. It’s all about money. On the one hand, you have people that want to turn a quick buck by lending out their credit history. On the other hand, you have someone who wants access to more credit than he or she can probably afford to have access to. While there may be nothing to legally stop the practice, that doesn’t mean that it is an ethical one.

Now, I am sympathetic to those who complain about the FICO credit ranking system to begin with. Surely it has its problems and the relative opacity of the whole system is a huge problem. But it is one thing to lobby to change the system for the better. It is entirely something else to craft ways of defrauding the system.

One interesting question that remains regards the initial practice. If I am correct that the practice is unethical, what separates it from adding our loved ones to our credit histories? If I am helping to deceive lenders by giving my good name to those with bad credit, aren’t I doing the same when I lend my credit to my children? Perhaps one can side-step the issue by appealing to the differences in the situation. In the case of the stranger, they have already soiled their own credit, have been kicked out of the club, and are looking for someone to secretly hold the backdoor open for them so that they can get back inside. In the case of my children, they have not ruined their own credit–they just don’t have any! Naturally, this will only apply to those loved ones who have little or no credit history. If I add a spouse who has a terrible credit history, aren’t I attempting to raise her credit score for the purpose of defrauding lenders?

It is a tangled web, indeed.