Can authorized user accounts, also known as authorized user tradelines, be used to build credit?
Credit expert John Ulzheimer, who has nearly 30 years of experience in the industry, answered this question in an episode of Credit Countdown. Keep reading to find out if tradelines really work from an expert’s point of view.
Disclaimer: The views and opinions expressed in this article are strictly those of John Ulzheimer and do not necessarily reflect the official stance or position of Tradeline Supply Company, LLC. Tradeline Supply Company, LLC does not sell tradelines to increase credit scores and does not guarantee any score improvements. Tradelines can in some cases cause credit scores to go down.
In 2009, the Credit Card Responsibility and Disclosure Act (CARD Act) was signed into law. The CARD Act restricted the ability of credit card issuers to approve consumers under the age of 21 unless they are able to prove that they have sufficient income to pay a credit card bill or if they have a cosigner on the account who is jointly liable for the debt.
As a consequence of this law, it became more difficult for young consumers to open up credit card accounts, which is a primary way that people build up their credit history, especially if they have never had credit before.
For young people and other consumers who do not have a credit history and need to build credit for the first time, or those who are rebuilding their credit after having bad credit, they are often advised to do so by finding a cosigner to open an account with, opening a secured credit card, or taking out a credit-builder loan.
A cosigner or guarantor can help you qualify for credit if you can’t qualify on your own. The role of a cosigner or guarantor is to pay back the debt if it turns out that you, as the primary borrower, fail to fulfill your obligation to pay it back.
To open a secured credit card, you make a refundable security deposit that becomes or goes toward your credit limit. That way, if you do not pay your credit card bill, the credit card company can just keep your deposit instead of losing money on the account.
Since secured credit cards are targeted toward subprime consumers, they often have higher than ideal interest rates and low credit limits.
You can think of a credit-builder loan as an installment loan in reverse. Instead of receiving the loan disbursement upfront and then making payments to pay off the debt, you make the monthly payments first and then receive the funds once the loan has been fully paid.
This unusual structure allows lenders to offer credit-builder loans to consumers who have thin credit or bad credit because the financial risk to the bank is much lower.
All of these methods have their pros and cons, which you can read more about in our other articles in our Knowledge Center, but there is another option to consider: the authorized user credit-building strategy.
The authorized user credit-building strategy, also sometimes called “credit piggybacking,” is a common method of building credit by being added as an authorized user to a primary cardholder’s existing credit card account.
As an authorized user, you are authorized to use the card for transactions, but you do not have any liability for the debt. The primary cardholder ultimately bears sole responsibility for footing the bill.
The authorized user strategy works for building credit, according to John, because most credit card issuers will add the history of the credit card account to the authorized user’s credit reports with Experian, Equifax, and TransUnion.
This is why the authorized user method is popular with consumers who are trying to build or rebuild their credit. For example, parents often use this strategy to help their children start building their own credit.
Some self-proclaimed financial “gurus” claim that authorized user accounts do not have an impact on your credit score, but this is a myth, says John.
In reality, virtually all credit scoring models that are commercially available, from both FICO and VantageScore, do consider authorized user accounts when your credit score is calculated.
Therefore, if the credit card account has been managed properly, it certainly has the potential to bump up your credit score as soon as the account shows up on your credit report.
If you are considering being added to a credit card account that belongs to someone you know, such as a friend or family member, it is crucial to first find out how the card is being managed. While piggybacking on an account that has been managed well can improve your credit score, it is also true that piggybacking on an account that has been managed poorly can actually hurt your credit score.
Here are some important things to consider before becoming an authorized user in this situation.
Credit scoring models penalize you for having too high of a monthly balance on the card relative to the credit limit of the card. This is what’s referred to as the revolving utilization ratio or the credit utilization ratio, and it’s very important to your credit score.
Too high of a balance on the card could increase your overall credit utilization ratio and thus bring down your credit score, which obviously is counterproductive.
On the other hand, the lower the utilization ratio is, the better it is for your scores, so look for a low monthly balance when considering an authorized user account.
This should go without saying, but if a card has any record of late payments or default, this could damage your credit score, because payment history is the most important factor that makes up a credit score.
To ensure a positive outcome, you need to make sure the account has a perfect payment history.
The ideal credit card to use for credit piggybacking should have:
If you can find an authorized user account with these three characteristics, John explains, that will be optimal for your credit scores.
Can authorized user accounts, AKA tradelines, improve your credit score?
Consumer credit expert John Ulzheimer explains factors that influence tradeline effectiveness.
0:38 Authorized Users—Can They Help Build Credit?
0:57 The Credit Card Responsibility & Disclosure Act
2:43 Authorized User Credit Strategy
3:44 Why the Tradeline Strategy Works
4:13 Myth: Authorized Users Have No Impact on Credit Scores
5:04 What to Do Before You Become an Authorized User
5:16 What to Know About Average Monthly Card Balance
6:00 What to Know About Account Payment History
6:18 What’s the Ideal Card to Use?