Authorized User Accounts Ignored in Credit Scores
What happens when you add an authorized user to your credit card account?
Elizabeth Carlassare
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Authorized User Accounts Ignored in Credit Scores
Today’s topic is understanding whether adding an authorized user to your credit card will hurt your credit?
Kabria e-mailed me with this question:
I have good credit and my boyfriend has bad credit. If I make him an authorized user on one of my credit cards will it damage my credit score?
Thanks for the question, Kabria.
In the U.S., people with little credit history or a poor credit history sometimes try to solve the problem by having a spouse, significant other, or parent with good credit add them as an “authorized user” on their credit card. For example, let’s say that you want to help your son establish his credit history. You could add him to your credit card as an authorized user. Many credit card companies report the payment history on both the primary cardholder’s and the authorized user’s credit reports. So the authorized user who wants to establish or improve their credit benefits if the credit card company reports the good payment history on their credit report.
What are Authorized Credit Card User Accounts?
So what is an “authorized user”? An authorized user can use the credit card, but is not responsible for making the payments. An authorized user is not the same as a “joint account” holder because a joint account holder is responsible for payments.
As long as the payments are made on time, adding someone as an authorized user to one of your credit cards shouldn’t negatively impact your credit score. But there are some really important things to consider before adding someone as an authorized user.
Should You Add an Authorized User?
First, ask yourself why you want to add the person as an authorized user. Does allowing the person to buy stuff with your credit card without any responsibility for paying for it make any sense? In many situations it doesn’t.
Second, adding someone as an authorized user to your credit card creates risk for both of you. For example, if you were to make late payments on the card, the information would likely appear on the authorized user’s credit report, as well as yours. And, if the authorized user were to make purchases you couldn’t afford, you’d be solely responsible for the payments.
Third, if you’re thinking about adding a friend or family member as an authorized user to help boost their credit score, know that this technique is going to disappear soon! Fair Isaac is about to change the FICO scoring model to ignore authorized user accounts when calculating credit scores. The scoring change is intended to stop credit repair companies from abusing this method. Some companies actually charge people with poor credit a fee to be added as an authorized user to a stranger’s credit card with a good payment history. And the stranger gets paid for allowing authorized users on their card.
Changes to Authorized User Policies
Fair Isaac will release the new scoring model starting in September. I’ve posted a link to the press release about this change on the Money Girl website at Quickanddirtytips.com.
When credit bureaus adopt the new FICO scoring model, the FICO scores of millions of authorized users will go down. Unfortunately, the change is bad news for young people who have established their credit history as an authorized user on their parents’ credit card. It’s also bad news for authorized users attempting to improve their credit by using a friend or family member’s good payment history.
Then again, if you happen to be an authorized user on an account that has a bad credit history, the change may actually raise your score.
If you are an authorized user and want the credit card payment history to continue to be factored into your credit score, you’re not out of luck. You can ask the cardholder to add you as a joint account holder instead. Remember, unlike an authorized user, a joint account holder is responsible for payments.
Bear in mind that some credit card companies will check your credit before adding you as a joint account holder. If your credit is poor, the credit card company may deny the application, or they may approve it, but increase the interest rate. If you’re having trouble getting approved and you want to build or rebuild your credit, you might want to consider getting a secured credit card instead.
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
Cha-ching! That’s all for now, courtesy of Money Girl, your guide to a richer life.
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Related links:
· Press release about Fair Isaac’s newest scoring model
Good Credit Bad Credit image courtesy of Shutterstock