Do tradelines work?

NOTE: The following is the conclusion to a huge (1,200 participant) study on the impact to credit scores by adding authorized user tradelines. Carefully consider it:

The addition of authorized user tradelines can be an effective way to improve a credit score. This effort tends to be particularly effective for individuals who have little to no credit history. For individuals with a starting credit score, authorized user tradelines can still be used to improve the credit score.

This study found that the average change in credit score for all 860 participants was a 108-point increase to Experian, a 70-point increase to Equifax, and an 83-point increase to TransUnion. Such a significant increase in score was expected since many participants started with no credit score. These participants skewed the results to higher-than-normal means.

The average change in credit score across all three bureaus was a 742-point increase for clients who had no credit score. This supports our hypothesis and makes sense because a jump from having no credit score (given a 0 score in this study) to even a bad score results in a 350-point increase since the lowest FICO score is 350. This finding is also in agreement with the study by the Federal Reserve (1).

The average change in credit score across all three bureaus was a 35-point increase for individuals who started the research with a credit score. This also makes sense because adding a tradeline to an existing score will dilute the impact of the added tradeline since there are factors beyond just the tradeline taken into consideration when determining the score.

More tradelines for credit score improvement has limits.

There was a positive correlation between the average increase in the credit score and the number of tradelines added. This increase was not linear, which agreed with our hypothesis, but contradicted the common opinion that more tradelines will always improve.

Because the credit scores consider multiple factors, adding more tradelines will dilute each tradeline’s impact. While this is still beneficial overall, there are diminishing returns on each line. Thus, any tradeline beyond the third added to the credit report tends to be only marginally effective at improving the credit score, particularly for individuals who started the study with a credit score.

During this study, there was a noticeable shift in the distribution of average FICO scores for each client from the lower score categories to the middle and higher score categories. This agrees with our hypothesis that tradelines help improve credit scores in a practical way.

This finding is also important because the score category that an individual is placed in impacts their interest rates and approval rates. Placement in a higher score category often results in lower interest rates and an increased likelihood of approval. Hence, the shift towards the higher groups implies that the tradelines can help the participants get approved for their financial goals or obtain better loan rates.

A higher limit does not always result in higher scores.

While it is commonly thought that the higher the credit limit of the tradeline, the more significant the credit score increase, this was not what was observed in the study. While the tradelines with over $35,000 had the most considerable average impact on the credit score, the tradelines from $20,000-$24,999 had the lowest impact on the credit score. The second and third most significant increases were seen by the tradelines that ranged from $10,000-$14,999 and $15,000-$19,999, respectively.

These findings indicate that while the higher limit tradelines can be beneficial for some individuals, the limit is not the only factor that should be considered when selecting a tradeline.

Additionally, there is no strong correlation between the size of the limit and the increase in the credit score. These findings also indicate that choosing tradelines appropriate for your credit file could be more beneficial than choosing tradelines based on their limit. While there are situations where high limit lines are necessary, this is not the case for most individuals.

In a similar vein, it was hypothesized that the older the tradeline is, the more impact it would have on the credit score. This was also contrary to the results in the study. It was found that tradelines with 6-10 years of history had the highest average impact on the credit score. Interestingly, the highest age group had the second-lowest effect on the credit score, indicating that age is not the dominant factor in determining the tradeline’s impact on the credit score.

The age of participants did not matter.

The impact of the tradeline for participants of varying ages was also analyzed. The study found no association between the participant’s age and the benefit they received from the tradeline. This implies that it is not the individual’s age that matters, but rather the information on the individual’s credit report that determines how much impact the tradelines have on the credit score.

Finally, every situation in which the tradeline did not result in an increased credit score was analyzed. The tradeline is just one portion of the credit report, and there are many other factors on the report that can limit or negate the impact of the tradeline.

The most common factors encountered when completing this study were increased utilization of the accounts, new collections, and new late payments. 35% of the FICO score is determined by the payment history and 30% by the utilization. Thus, it logically follows that poor payment history and high utilization can inhibit the tradeline’s effects.

Our findings support this conclusion.

Collection accounts matter.

Collections are also negative accounts that can hurt the credit score, which agrees that this was our third most common negative factor that inhibited the tradeline from providing benefits to the participant. Having recent negative information on the credit report can seriously impede the tradeline from impacting the credit score.

These are the most common factors that inhibit the tradeline from providing benefits. However, only 5.8% of the participants in this study experienced no increase or a decrease in their credit score.

While this study found a correlation between the addition of authorized tradelines and an increase in the credit score, some caveats go along with this analysis.

Credit scoring models change often.

First, credit scores are constantly changing due to all the credit reports’ factors and the ever-changing score models released by scoring companies like FICO. Because of this, isolating any one feature (age, limit, number of tradelines added, etc.) is next to impossible.

There were correlations between the tradelines’ features and the impact on credit score. However, the relationship between the features analyzed and the change in the credit score is not causative.

Additionally, all of the seasoned tradelines used in this study are in good standing, meaning they have no late payments, consistent utilization of the account, and utilization below 30%. Since late payments and high utilization can have adverse effects on your credit report and credit score, it is crucial to only utilize tradelines in good standing to improve your credit score.

This study did not analyze the impacts of tradelines that were not in good standing and cannot represent how poor standing lines affect a credit score.

Credit use can change scores.

Finally, all clients were using their credit outside of our study. During the study, consumers continued to use their credit. This added uncontrollable changes in the reports that could factor into the credit score. The primary examples of these are the client applying for new credit, making payments, or changing their credit utilization. These examples can alter the tradeline’s impact on the credit score, either positively or negatively, depending on the situation.

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