Individuals who are Authorized Users on credit cards are credit card holders who have the ability to use a particular credit card, but are not legally liable for the credit card debt.For example, adding your son as an authorized user on your credit card will help him establish a credit history because the account (including the payment history) will report on his credit report.
An Authorized User has the ability to use a credit card for purchases just as the primary account holder, but without any of the financial liability or responsibility. Only add someone you can trust since they will have access to your credit card account. As a precaution, when adding an authorized user on your credit card, consider lowering credit limit on that particular account. One of the most common reasons for adding authorized users is to give children credit cards which they can use for emergencies.
Authorized user accounts are a great option for people who are in the process of building or rebuilding their credit history. A good authorized user account will help boost the credit score of the person who is being added to the account. Keep in mind, although the FICO algorithm recognizes authorized user accounts when calculating the credit score, a lender may or may not take the actual trade-line into account when making lending decision. As a result some individuals will still see a benefit from authorized user accounts while others will not.
Piggybacking is a for-profit form of “credit renting”, a growing practice that allows people with bad credit to piggyback on the strong payment histories of certain credit card holders by becoming authorized users on their accounts.A person with no credit score or a low credit score pays a fee to another individual to become an authorized user on an account with a perfect payment history, good utilization rate, and long length of history. The payment given to the person allowing the piggybacking on his or her credit history depends on the quality of the trade-line itself.
With the newly improved score, the consumer is now able to obtain a lower interest rate on mortgages, car loans, or personal loans.
The impact on a credit score can vary depending on what else is in a client’s report, but one borrowed credit card account can increase a score between 30 to 45 points, two accounts can increase a score anywhere from 60 to 90 points, and five authorized user accounts can boost your credit score between 150 to 205 points.
This is because the credit scoring model that calculates credit scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps increase the credit score. So what was once considered something parents could use to help their kids get started with credit or a mechanism that a spouse could use to help their significant other boost their credit scores, is now being scrutinized as credit piggybacking.
Today’s practice of credit piggybacking is a loophole in the system. FICO has already tried to remove the authorized user loophole once (see FICO ’08), but was forced to keep the authorized user component of their algorithm in place. Have no doubts about one thing, if FICO and the credit bureaus had it their way, this loophole would completely gone.
There’s a lot more to joint credit accounts than one might first consider. Slight differences in types of joint accounts can significantly impact your credit scores and debt liability. Before you add an authorized user to your account or cosign on a loan for a friend or relative, make sure that you read the information below.
1. There are 2 different types of joint credit accounts
Joint Credit Account:
As a joint account holder you incur an inquiry upon applying for the account, you are 100% liable/responsible for the debt, and the account reports to your credit file.
Authorized User Account:
As an authorized user, you do not incur any inquiries when added to the account, you are not responsible for any of the debt but, the entire payment history and account info reports to your credit file.
2. Joint Accounts, Individual Credit
Although you may have joint accounts with your spouse or family member you still have an individual credit report. Joining accounts does not joint credit files, your credit history, debt liability, and credit scores are still uniquely yours and yours alone.
3. Divorce decrees cannot reappropriate debt from credit reports.
Courts can reassign responsibility for debt such as personal loans, credit cards, auto loans, mortgages, etc… Entering a judgment that one spouse to take 100% responsibility for the debt but, they cannot force the credit bureaus to reassign the responsibility from the credit reports and remove the account from a credit report.
4. Co-Signer has 100% Responsibility.
Although there may be 2 signers on a debt you may think that each is liable for 50% of the responsibility. The reality is that both the primary signer and the cosigner are each liable for 100% of the debt. If the primary signer falls behind, the lender can go after the cosigner via collection agency and even file suit for 100% of the debt.
5. Household Income is a thing of the past
Remember when you filled out an application for credit 10-20 years ago, it would ask you for your household income. That way an unemployed housewife could qualify for a credit card based on her spouses income. Well, the Federal Reserve changed that. As of right now, lenders can no longer use household income to determine a consumer’s ability to repay a loan. Individual income has replaced household income, this leaves stay at home /unemployed spouses with limited options for getting a loan.
6. Joint Credit, Joint Reward, Joint Punishment
Joint credit means that you can benefit from the positive payment history that populates your credit report and increases your scores when the account is being paid on time. You can also be punished for a derogatory payment history that lowers your credit scores and destroys any chances of you being able to qualify for a mortgage, auto loan, credit card, etc… all because you cosigned for someone who missed some payments on their loan.
Be careful who you cosign for and make sure that you have the means of taking over the payments on the loan if the primary signer cannot.