Let’s be honest: while having good credit is a wonderful feeling, the actual process of building good credit is about as much fun as a root canal. It’s slow. It’s tedious. And it requires a lot of patience. If only there were an easier way…
There is! There is a strategy you can try that might push your credit in the RIGHT direction.
If you have a loved one who is willing to do you a big favor, there’s a chance you could establish fantastic credit scores in a relatively short period of time.
So, what’s the big favor…and what’s the catch?
You’ll need to find a friend or a family member who will add you onto an existing credit card account as an “authorized” user.
What Is An Authorized User?
When you open a credit card, most card issuers will let you add other people onto your account. By adding others, you’re giving them permission to make charges. This process is known as adding an authorized user.
Being an authorized user means you’re allowed to use someone else’s credit card account. However, you’re not legally responsible for paying the bill. That’s the primary or joint card holder’s job.
If your loved one agrees to help you, the process of adding an authorized user is usually simple. Here’s how it works:
- Your loved one calls the credit card issuer and requests to add an authorized user onto an existing account.
- The card issuer may request information like the authorized user’s name, address, date of birth, and Social Security number.
- A new credit card with your name on it is mailed to the primary card holder’s address—typically within a few days.
How Authorized Users Build Credit
Now here’s the exciting part: getting added onto your loved one’s credit card account has the potential to help you build your own personal credit. You just need to know how authorized users build credit.
You probably already know that when you open a new credit card, the issuing bank reports the account to the three major credit bureaus—Equifax, TransUnion, and Experian. Many card issuers will also report the same account to the credit bureaus again for authorized users.
So, if a credit card shows up on your report after your loved one adds you to the account, all of the history associated with that account usually gets added to your credit report as well. In fact, an authorized user account could possibly help your credit in three different ways.
Being added onto a credit card with good payment history means that payment history becomes yours as well (when/if) the account is added to your credit report. Payment history is worth 35% of your FICO scores, so it's safe to say this can be a big deal.
Becoming an authorized user might also help you when it comes to credit utilization. 30% of your FICO Scores are largely based on how you manage the balance to limit ratio on your credit card accounts.
An authorized user account will be factored into your revolving utilization ratio once it’s added to your credit report. Assuming your loved one has a good habit of utilizing only a small percentage of the card’s available credit limit, your credit scores could also benefit from that good habit.
Age of Credit
The third way of how authorized users build credit is by increasing the average age of accounts on your credit report.
Age matters when it comes to credit scoring. As far as scoring models are concerned, the older your average age of credit, the better.
Does all of this credit-building potential of how authorized users build credit sound too good to be true?
Well, there are some potential issues that you should know about upfront.
The Risks of Authorized User Accounts
When everything goes well, having a loved one add you on as an authorized user could be great for your credit. However, authorized user accounts can be risky—both for the primary account holder and the person being added to the account.
Risks For The Authorized User
Although knowing how authorized users build credit can be a smart credit-building strategy, it can also backfire. Here’s how: there’s a chance that becoming an authorized user on someone else’s card could drag your score down, instead of helping it.
If you’re added onto an account with a history of late payments or a card that’s heavily utilized, it could damage your credit score.
Even if the account is managed well when you’re added to it, if that ever changes in the future your credit rating could suffer.
But this is a problem that’s usually easy to solve.
When a card that you’re an authorized user on starts to hurt your credit, you can ask to be removed from it. Remember, you have no legal obligation to pay the debt.
Once removed, you can dispute the account with the credit bureaus and ask for it to be deleted from your reports.
Risks For The Primary Account Holder
If know-how authorized users to build credit and you’re thinking about adding a loved one to your credit card account as an authorized user, it’s important to only add someone you trust.
Any charges your authorized user makes on the account will be your legal obligation to pay.
Your loved one might agree to pay for any charges he makes, but what if he doesn’t come through? Here’s what will happen: you’ll be stuck holding the bill. If you don’t pay, there can be consequences.
Thankfully, there are a few ways to reduce this risk.
First, only add trustworthy friends or family members to your account. You can also put usage limits on authorized users if your card issuer allows it.
You might consider keeping the card in your possession and only allow it to be used for purchases you specifically approve.
The Bottom Line
Instead, an authorized user account (or two) should only be one part of your overall credit-building strategy.
If you want to earn and keep good credit for the long haul, it’s also crucial to establish credit in your own name and manage those accounts the right way.
Want to learn more about credit? Watch our online course Intro to Credit: How to Get Started, Boost Your Score, & Leverage Credit to Build Wealth by clicking here.
Michelle Black is a credit expert with over 16 years of experience in the industry and a freelance writer.