A common question I get from Money Girl podcast listeners is about managing credit. Lately, it seems like many people are ready to pull the trigger on buying a home, but they’re getting rejected for a mortgage because their credit is too low. Or their credit score is preventing them from getting approved for a loan with a competitive interest rate.
Here’s recent email I received: “A friend told me that I should become an authorized user on someone’s credit card who has really good credit. Will that raise my credit score so I can qualify for a mortgage?”
Keep reading and I’ll give you the truth about whether authorized users on credit cards can build credit. Plus I’ll answer other questions about how having an authorized user affects the primary card owner.
What is An Authorized User on a Credit Card?
Credit cards are a smart way to build credit because they’re relatively easy to get. Additionally, you don’t have to pay a penny in interest or fees to build an impressive credit file over time. One way to get a credit card is to become the primary cardholder or to co-sign for a card with someone else. As the sole cardholder or joint account owner, you get a card in your name, are 100% responsible for the debt, and have the all the account transactions reported on your credit file.
Another way to get access to a credit card is to become an authorized user on someone else’s card. Being an authorized user means you can get a card in your name, but have no legal liability for the debt—only the primary cardholder is responsible for making monthly payments.
Can Authorized Users Build Credit?
There’s a lot of confusion about whether being an authorized user helps boost your credit. The reality is that it may or may not help—it depends on the following 3 factors:
Factor #1: What Information Credit Card Companies Report
Some credit card companies report account transactions to both the primary cardholder and the authorized user’s credit files. But some report them to the primary cardholder’s credit report only. That means you need to find out what a card company’s reporting policy is before you assume that being an authorized user will be a credit slam dunk.
Factor #2: What Information Scoring Models Use
Most people don’t realize that there isn’t just one credit score. A representative from Experian (one of the 3 major nationwide credit reporting agencies) told me that there are over a thousand different credit scoring models. Different companies—like mortgage lenders, insurers, auto lenders, and property management companies—use different credit scores to evaluate potential customers.
Not all credit scoring models count information that’s reported for authorized users. So, even if the primary cardholder has diligently made payments on time and that information is reported to an authorized user’s credit file, it may not be factored in some credit scores!
Factor #3: Payment History of the Primary Cardholder
If all the stars align and the card company reports information to your credit file and the credit scoring model takes authorized user transactions into account, you have to consider the value of the information. What I mean is whether the primary cardholder has been making on-time payments or not. If they’ve been irresponsible, that could damage your credit.
What Credit History Is Shared with An Authorized User?
What about becoming an authorized user on a card that had late payments in the past? I received this question from a daughter who was worried that her father’s financial troubles from a few years ago would damage her credit if she became an authorized user on his credit card. The answer is that his prior account history wouldn’t show up in her credit file—just the payment history that occurs after she signs on to his card.
Can an Authorized User’s Credit Affect a Primary Cardholder?
Another point that I want to make is that information is only shared one way, from primary cardholder to authorized user. In other words, the credit history of an authorized user is never reported on a primary cardholder’s credit report. So even if you have terrible credit, you don’t have to worry that your past mistakes could damage the credit of a primary cardholder.
Dangers of Having an Authorized Credit Card User
If you’re considering adding an authorized user to a credit card, be sure to lay down some guidelines about how to use it. For instance, if they overspend or max out your card, you could be stuck with a massive bill and see your credit score plummet. Most cards allow you to set separate credit limits on authorized user cards. Also, be sure they understand how to keep your card number confidential so you stay safe from cybercrime and identity theft.
For more information about raising your credit score, the Credit Score Survival Kit is a free multimedia resource that teaches you how to build a credit score you can be proud of.