5 questions every authorized user should ask
Speaking of Credit
Dear Speaking of Credit,
My credit score is bad. I want to be an authorized user on one of my friend's credit cards. I will not use the new authorized credit card at all. Would my credit score increase with my friend's credit card usage (purchases/spending)? -- G.
It's no longer a secret that being added as an authorized user -- also known as "piggybacking" on someone's credit card -- can be a good way to boost your own credit score. While initially intended to apply to spouses and significant others who share financial responsibilities, a unique credit-building feature of an authorized user account is that, without taking responsibility for charges on the card, the entire account history is included in the authorized user's credit file and credit score.
Authorized user involvement can take various forms, including regular use, emergency-only use and credit-building (or rebuilding) use. An authorized user is usually a child or spouse of the primary cardholder, but it can be anyone whose name the primary cardholder agrees to add to the account.
To discourage for-profit piggybacking schemes in which authorized user trade lines are "sold" to strangers looking to repair their credit, the latest versions of the FICO scoring formula, beginning with the FICO 8 model, provide less of an incentive for exploitation by reducing the positive scoring impact from an authorized user account than for one held as the primary account holder, either individually or jointly.
Still, adding an authorized user account to your credit report can help your score, both when the latest FICO models are employed and to a greater degree with the older versions still in use, such as in mortgage lending.
While the sharing of a credit card's history can be a great way to raise your credit score by essentially creating a credit file where there wasn't one or enhancing the good credit you already have, being an authorized user is not without its downside. Along with the clear benefits of adding positive credit history to anyone's credit score, becoming an authorized user on a card with a not-so-positive track record that includes late payments or high utilization can lead to more problems than additional score points.
The trick then is knowing which way your score is likely to go before you take that initial step. But how?
One easy way to know the condition of an account you may be adding to your credit record is to review the primary cardholder's credit report. Understandably, people are not always willing to share such personal information. Or they may not know because they haven't checked their credit reports recently. And even when a recent credit report is available, the information on it won't necessarily give you all you need to know.
With that in mind, I've put together the following five questions you may want to ask the primary cardholder on your way to understanding what kind of impact the card is likely to have on your score:
1. Have there been any late payments made on the account? Since payment history is the most important part of your score (35 percent), the most important piece of a credit card's history is its payment record. Ideally, there should be no late payments being reported for the card. If there are, you may want to rethink this decision or determine how long it's been since the last time it was late and know that the older a late payment becomes the less harm it does.
2. What is the card's typical monthly credit utilization percentage (balance/limit ratio)? At almost 30 percent of the score, credit utilization is second only to payment history in scoring importance. Once added to your credit file, the latest account balance and credit limit on the authorized user card will be included in your own credit utilization calculations that look at both individual and combined card usage. If the authorized user card's utilization percentage is lower than your combined average, that's good news. If higher, be concerned that your score may drop when the account becomes part of your credit picture.
3. Do you pay the card balance in full each month? Hopefully, the answer will be yes, as paying the balance in full every month is a good indicator of financial stability. Yet paying in full each month doesn't automatically mean that the addition of the account to your credit report will help your score. For instance, since the balance used in utilization calculations tends to be the amount owed on the date of the last billing statement, if that balance makes up a high percentage of the limit the resulting high utilization for that card could lower your score until later paid in full.
4. How long ago was the account opened? The open date on the authorized user card, as with all other accounts on your credit report, will be used in scoring calculations that measure how long you've been using credit (15 percent of your score), such as the average age of your accounts and the ages of your newest and oldest accounts -- with older always being better.
5. Do you have plans to make a major purchase or a number of purchases on the card that will raise the balance? You'll be hoping not. If so, expect to see higher utilization and at least a slightly lower score for as long as it takes the primary cardholder to pay the balance back down.
If, in the end, you and the primary cardholder decide to add your name to the account, check your credit report and score after about 45 to 60 days to make sure the account is being reported accurately and that it's having the intended effect on your credit.
Of course, much of whether adding an authorized user account is likely to raise or lower your score will depend on the current condition of your own credit report and score, without the authorized user card. This means that whatever your reason for taking the authorized user route, if you already have a spotless payment history and low utilization you have more reason to be concerned about the future impact of this card than if your own credit history is not so perfect and includes some recently late payments or currently high credit utilization.
Regardless of how much you're able to learn about an account you may soon be sharing, any answers you can get to questions such as these could mean the difference between helping and hurting your credit score.
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Published: September 3, 2015
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