How to graduate from parents' credit, cut 'authorized user' cord
Don't ditch the guest card too quickly; you could lose score points
By Sienna Kossman | Published: February 1, 2016
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If your credit profile is young, thin and needs a little extra help, being an authorized user on a parent's credit card can be a great way to boost your credit and even prepare you for independent credit management in the future.
However, like many aspects of growing up, there will come a time to separate yourself from mom and dad and stand on your own two credit feet.
Just don't jump to that point too quickly.
When you cut authorized user ties, you'll immediately lose any credit score benefits your parent's account may have provided, which could negatively impact your score if you're not prepared to bounce back.
"The worst thing you can do is delete yourself from those cards right off the bat," says Wayne Sanford, owner of New Start Financial Corporation. "When you are trying to get out from mama bear's wing, make sure you are methodical."
If you think it's time to start forging your own credit, here's some advice for carefully making that decision so you don't disrupt your sensitive credit score.
How being an
authorized can help you
Authorized users get all the benefits of a credit card without having to qualify for the card and without the responsibility of repayment. The practice is also referred to as piggybacking. So, if your parents add you as an authorized user on one of their longstanding cards, the account's history is added to your credit reports, which will likely increase your credit score thanks to the positive repayment history associated with the account.
As an authorized user, you will receive a card with your name on it, but you won't have control of the account nor bear the responsibility of repayment.
How being an
authorized user can work against you
The negative side of being an authorized user is if your parents fall behind on payments or routinely max out the card. Those bad behaviors will generally be reflected on your credit reports as well.
So if being an authorized user is harming your credit, waste no time getting yourself removed.
When you are trying to get out from mama bear's wing, make sure you are methodical.
|-- Wayne Sanford
Owner, New Start Financial Corporation
"If the card has late payments or the card is being over-utilized, then it's probably a good idea to get rid of the card," says Michelle Black, author and credit expert with HOPE4USA.com, a credit education and restoration resource. Take solace in knowing that as an authorized user, any negative credit account information will be removed once you are no longer associated with it.
"If something negative happens with that account, like someone doesn't pay, it's Experian's policy that the negative information will be removed from the authorized user account," says Susan Henson, vice president of consumer education for Experian. That negative information, however, would remain on the parent's account, she said.
While the negative account information can be easily remedied by getting off the card, unless you are actively applying for credit or routinely checking your credit report, "You might not even know it's going on," says David Weliver, founding editor of Money Under 30, a personal finance advice blog for young adults. "The parent might not readily admit these types of financial situations to their kid, even though it might regularly affect them. That might be enough incentive to get out before something like that even happens."
step at a time
The best way to graduate to a card of your own is to apply for one before you cut your authorized user ties with your parents, unless, of course, association with that account is hurting your credit. Why? Because once you sever those ties, you'll lose the credit history associated with that card and your credit score will drop. You need a healthy score (in addition to an income of some sort) to qualify for a card on your own. Here's what to do:
your credit report and score.
When deciding if it's time to graduate from mom and dad's card account, don't ignore your credit score, as you'll need one to open your own accounts.
"The main thing a young adult should do before transitioning to their own credit card is make sure they've attained a good credit score, ideally over 650," says Priyanka Prakash, a finance specialist with FitBizLoans.com. "Having a credit score above 650 helps you qualify for the credit cards with the best rewards points and other perks, like no annual fees, and also helps you qualify for a good interest rate."
So, pull a free copy of your credit report from annualcreditreport.com and pay (about $20) for a FICO score from myfico.com. You can also go to My.CreditCards.com for a free credit report and score, although the credit score is the less widely used VantageScore. Both pieces of information will help you determine how being an authorized user has helped you (or hurt you), what types of credit cards you may qualify for and what areas still need work.
If something looks wrong, such as accounts that are not yours or incorrect information is listed, dispute those inaccuracies with the credit bureau. If all looks good, it's time to explore your parent-free credit options, so long as you are over 18 and have a source of income.
for a new line of credit.
Since your credit score will likely take a hit after you are removed from an authorized user account, you'll want to take advantage of the credit boost it (hopefully) gave you before the arrangement ends. Unlike the way traditional closed credit account information hangs on your credit report for 10 years, once you are removed from an authorized user account, the account information falls off your report completely. Experts recommend opening one, maybe two, lines of credit to get you started on your independent credit journey.
"If you're hesitant about making the jump to your own card, you can start off with a secured credit card," advises Prakash. "With a secured card, you put down a deposit and get a credit card that has a spending limit equal to the deposit amount. This can help you rein in spending and monitor your spending patterns before you get a regular card on your own."
A secured card might not feel very "independent" at first, but it's a smart way to ease into solo credit management.
As you gain experience, you'll know yourself and understand if you can continue using credit responsibly without your parent's credit cushion.
|-- David Weliver
Founding editor of Money Under 30
"Think of those cards as stepping stones to go to apply for regular cards," Sanford says. "You are using the good family credit to help you to that next level."
account(s) for a few months.
No, graduation preparation isn't over just yet. Becoming credit independent is more than just having a good credit score. "I think the most important thing to consider is [have you] really learned how to manage credit in the time you've been an authorized user?" Henson says.
After you receive your new card, work on charging small items regularly and repaying the balance in full for a few months while still piggybacking on your parent's card to ensure your transition to complete credit independence will be smooth.
Establishing a consistent pattern of debt repayment is crucial.
"You have so little credit history to start and one or two late payments at the beginning can really set you back," Weliver said. "As you gain experience, you'll know yourself and understand if you can continue using credit responsibly without your parent's credit cushion."
While you focus on establishing your own credit, don't use the authorized user card. "Give [your parents] the authorized user card back just to keep the record open," Black says.
Request your authorized
user account be closed.
After several successful months of using your new card, it's time to close your authorized user account. Let your parents know what you are planning to do and then contact the credit card issuer. You should be able to remove yourself as an authorized user without your parents' permission. Usually, all it takes is a phone call to the toll-free number on the back of the card.
Be prepared for a hit to your credit score once you're removed. Assuming your parents have been using credit for many years, closing an authorized user account will lower the average account age on your credit report and, as a result, lower your credit score. Length of account history represents 15 percent of your FICO credit score.
Plus, closing an authorized user account also raises your credit utilization ratio if you carry a balance on any other account. For example, if your parent's account had a balance-free credit limit of $5,000 and your new credit card has a $1,000 limit with a $500 balance, a closed authorized user account would take your credit utilization ratio from about 8 percent to 50 percent.
Don't worry, your credit scores will rebound the longer you successfully manage any future lines of credit or loans.
"That's it," Sanford says. "Now you are standing on your own two credit card feet."
Lastly, don't forget to give thanks where it's due.
"Make sure to thank whoever it is who added you as an authorized user," Henson says. "They really put a lot of trust and faith in you by doing that. Show gratitude for getting you off on the right credit foot."
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