This article was contributed by credit expert John Ulzheimer.
One of the more common questions I receive from consumers is how they can best establish credit or improve their credit scores. It’s a hard question to answer without seeing their credit reports. There are many paths to poor credit scores so the advice isn’t as simple as one universal answer. The answer is going to vary based on each consumer’s individual credit situation.
As to the “how can I establish credit” question, that one is certainly easier to answer because there is a finite number of options to choose from when building or rebuilding a credit report and a credit score. My favorite option is the same one my parents used some 33 years ago when I was 18 years old and headed off to college. My father added me as an authorized user on one of his credit cards.
If you’re not familiar with authorized users, you can read more about them here. Or, I can save you some time; an authorized user is someone who is added to the credit card account of another person. The authorized user has the same spending permissions as the primary cardholder, but without any of the payment or debt liability. Almost all large credit card issuers will allow their primary credit cardholders to add authorized users to their accounts.
The upside to being an authorized user is most credit card issuers will report the history of the credit card account to your three credit reports as maintained by Equifax, Experian and TransUnion. This means not only will lenders see the account on your credit reports but, also, credit scoring systems will consider it when calculating your credit scores.
Authorized Users and Credit Scoring
All commonly used credit scoring systems will consider an authorized user account or “tradeline” as a scored attribute. In English that means if you’re an authorized user on someone else’s credit card account and that account is reported or “furnished” to the three consumer credit reporting agencies, and it ends up on your credit reports, then it will be considered in the calculation of your credit score.
In most scenarios, an authorized user credit card account is treated no differently than if you were the primary cardholder. The balance, the credit limit, the age of the account, and the account’s payment history would be treated no differently. If all of those credit card attributes say good things about you, the card will likely help your credit scores. And conversely, if the card is mismanaged then you too will likely suffer a credit score impact, just like the primary cardholder.
There was a time many years ago when authorized users were being abused as a credit repair strategy to temporarily boost consumer credit scores. The response…in June of 2007 the primarily used credit scoring company announced that they would no longer count authorized user accounts in their upcoming credit scoring system. The reason they gave was that by no longer counting authorized user accounts in the calculation of a credit score they would be protecting lenders from the practice of piggybacking on someone else’s credit card account.
Thankfully the company reconsidered their position after consulting with the Federal Reserve Board and the Federal Trade Commission. Instead of simply ignoring authorized user tradelines, the company instead implemented logic into their future credit scoring models that reduced the potential impact from piggybacking. [1] The specifics as to the exact treatment of authorized user tradelines by these newer credit scoring systems have never been publicly disclosed.
How Authorized User Tradelines are Helpful
Assuming an authorized user tradeline makes its way to your credit reports, it can be helpful in a variety of ways, which I alluded to above. First and foremost, lenders like to see positive information on credit reports, and that has nothing to do with your credit scores.
If the authorized user account is old, it will help to increase your average age of accounts, which is an important factor in your credit scores. If the authorized user account has a clean payment history, that is helpful to your credit scores. And, maybe most importantly, if the authorized user account has a low balance relative to the credit limit, that is very helpful to your credit scores.
Really, the only way an authorized user account can hurt your credit scores is if you choose to associate yourself with a poorly managed account. For example, you’d never want to have your name added to an account that had a history of late payments. And, you’d never want to associate your name with an account that has a large balance relative to the credit limit. These are score-damaging qualities of a tradeline, which would certainly point your credit scores in the wrong direction.
[1] From the Written Statement of Fair Isaac Corporation before the U.S. House of Representatives Committee on Financial Services Subcommittee on Oversight and Investigations.
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He is the President of The Ulzheimer Group and the author of four books about consumer credit. Formerly of FICO, Equifax, and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has 27+ years of experience in the consumer credit industry, has served as a credit expert witness in more than 370 lawsuits, and has been qualified to testify in both Federal and State courts on the topic of consumer credit. John serves as a guest lecturer at The University of Georgia and Emory University’s School of Law.
Disclaimer: The views and opinions expressed in this article are those of the author John Ulzheimer and do not necessarily reflect the official policy or position of Tradeline Supply Company, LLC.
Credit Countdown Video: Consideration of Authorized User vs. Primary Accounts
John Ulzheimer explains how primary accounts and authorized user accounts are treated by credit scoring systems in the video below. Find more Credit Countdown videos on our YouTube channel!