In 2009 the U.S. Congress passed, and President Obama signed into law, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009. This law, which is more commonly referred to as the CARD Act, restricts credit card issuers from extending credit to consumers who are under 21 years of age, except under limited conditions. The impact of the CARD Act, among other things, has made it harder for young people to build credit reports and establish credit scores.
This is just one example of the difficulties various segments of our population endure when they are trying to build or rebuild their credit reports. Certainly people over 21 who have experienced their own credit disasters have their own unique hurdles with which to deal when trying to build or rebuild their credit reports.
It’s not uncommon for financial experts to advise consumers to look for co-signers, open secured credit cards, or take out credit-builder loans as various strategies to build or rebuild their credit. All of these credit-building strategies have their own respective pros and cons. Some work better than others, some work faster than others, and some are just bad ideas.
The “Authorized User Strategy”
One common method for building credit reports and credit scores is to become an authorized user on a credit card account that belongs to another consumer. The way it works is fairly simple. The primary cardholder adds the new consumer’s personal information to their account and “authorizes” them to use the credit line. The newly added authorized user has the same permissions to use the card as the primary cardholder but has no liability for the debt. Think of it as a credit card but with training wheels.
Most credit card issuers will then report the history of the credit card account to the authorized user’s credit reports at Equifax, Experian, and TransUnion. The addition of the credit card helps to build or rebuild the credit reports of the authorized user.
The Impact of Authorized User Tradelines on Credit Scores
Credit scoring systems, such as those built by FICO and VantageScore Solutions, will consider the newly added credit card account the next time the authorized user’s score/s are calculated. And, if the credit card account has been managed properly, it can certainly help to improve the consumer’s scores almost immediately.
To the extent you are thinking of becoming an authorized user on the credit card of another person, you should first learn a little bit about the card and how it has been managed. You’re going to want to find out the age of the card, and the older it is the better it will be for your credit scores.
You’re going to want to find out the credit limit of the card and also its average monthly balance. This is important because credit scoring models will penalize you if the balance represents too much of the credit limit. This is formally referred to as the card’s “revolving utilization ratio” and it is calculated by dividing the card’s balance by the card’s limit, as they appear on your credit reports. The lower the ratio, the better for your scores.
And finally, it should go without saying that you’re going to want to ensure the card has always been paid on time and there is no record of late payments associated with the account. Late payments, of course, are not good for your credit scores.
In the perfect scenario, you’d like to become an authorized user on a card that is decades old, has a very high credit limit, a low balance, and has always been paid on time. This the optimal account to have on your credit reports and it is a fantastic way to build your credit reports and credit scores.
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.