What are tradelines?
A trade or tradeline refers to a credit or charge vehicle issued to an individual customer by a credit grantor. Simply put, tradelines are any account that appears on your credit reports and includes information about the creditor and their debt. There are two categories of tradelines - revolving tradelines and installment tradelines.
Revolving tradelines are credit products that creditors can use multiple times. The accounts “revolve” as the balance fluctuates month-on-month based on usage. These can include credit cards and equity lines such as a home equity line of credit.
Installment tradelines are credit products that creditors will have to pay back monthly during a fixed amount of time such as personal loans or mortgages.
In order to more accurately judge your creditworthiness, lenders may look beyond your credit score to check the tradelines on your credit report and gather more information. The information available can include the creditor or lender’s name, current balance, credit limit or loan amount, payment history, amount of the last payment, and current account status.
Credit reporting bureau, Experian, cites the following as examples. For instance, if you are behind payments with a certain account, a lender might check the tradeline to find out how long the account has been delinquent. If your credit scores have dipped due to a high utilization rate on a credit card, a creditor can determine whether you are a credit risk by checking the balance against the credit limit.
As credit agencies build credit reports based on these tradelines, the information of each tradeline will impact your credit score. Factors such as payment history, credit utilization, and credit history will be reviewed in the calculation of your business credit score. For instance, the longer a tradeline has been opened with regular and timely payments, the more positively your score will benefit. You will not be able to have a credit score unless you have at least one tradeline that is opened for at least 6 months and reporting to the credit bureaus.
Why do people purchase them?
Given that your credit score and/or information will ultimately influence not only access to credit but also how much of it is granted, there are those who seek a ‘quick fix’ to build up business credit in the shortest time possible. Unfortunately, these tend to be unethical and have legal repercussions.
One known practice is known as ‘piggybacking’ tradelines. Basically, companies that offer this ‘piggybacking’ service will have creditworthy cardholders or vendors at their disposal. A third party, in a bid to boost its business credit, may contact such companies and pay a fee to be added as an authorized user to these established tradelines. The company would not provide you with actual account information such as credit card numbers and the idea is that these established tradelines will show up in your report for a significant amount of time, thereby boosting your business credit score.
As to where these companies procure such tradelines, these accounts could simply be stolen, from persons dead or alive, or synthesized identities. It doesn’t come cheap either - fees could range from $500 to $2000 per tradeline.
Why you shouldn’t buy tradelines to build your business credit
If your account is associated with a suspicious tradeline, your credit profile is likely to be red-flagged and potentially shut down. Furthermore, purchasing tradelines means that you are complicit in committing fraud.
In a 2008 New York Times article on credit score boosting, an executive at FICO, a major provider of credit scores, expressed that even if there is a legal loophole to artificially inflating one’s credit score, the borrower is deliberately misrepresenting himself and his credentials to the lender. This act of falsifying one’s credit history constitutes as one definition of loan fraud.
As FICO, as well as the 3 major credit bureaus, Equifax, TransUnion, and Experian, are keenly aware of such schemes, they have been finetuning credit scoring models in order to limit the impact of authorized user tradelines. For instance, the FICO 08 scoring model, which was released in late 2009, amended the impact of authorized user accounts on credit scores - authorized users will receive no impact to their credit scores unless they are associated with immediate family members such as relatives or spouses.
That said, even if you are able to legally associate yourself as an authorized user to your immediate family member’s tradeline, it may not be the best way to build your business credit. As an authorized user, you will have no control over the cardholder’s behavior. If the primary cardholder has a high utilization rate or has issues with timely payments, it would negatively impact your credit score. For example, if your immediate family member pays a credit card bill more than 30 days late, as an authorized user, you will also have up to 100 points knocked off your credit score.
What you should do instead
Buying tradelines to artificially boost your business credit will catch up to you, whether now or in the future. Although such shortcuts can be tempting, it could backfire tremendously and ruin your credit profile. Instead, we would encourage you to kickstart your business’ credit history and build a better credit score on your own.
For instance, a good alternative to consider would be to open a secured credit card. This type of card requires you to deposit money with the credit card company and you are able to make charges on the secured card up to the amount you have deposited. You may consider taking a small business loan to help with cash flow by financing necessary purchases to fulfill orders. If so, it is important that you pay such bulls on time.
The two biggest factors that affect a personal credit score are payment history (35%) and credit utilization (30%). The same can be said for business credit, albeit in business spending. Although there are unique business considerations that credit bureaus account for such as demographic details, company size, and industry risk, you can do your part to help your business. As mentioned, getting a secured credit card and paying them on time consistently will set the foundations for building a good credit profile.
Slow and steady wins the race and so it goes with building business credit. Avoid taking shortcuts such as buying tradelines and spend time and effort to understand how traditional credit reporting agencies work. With time and consistent effort, a business credit score of 80 and above is within reach.