Question: “In the past, our mortgage company has encouraged borrowers who have either little credit or are rebuilding their credit to become an authorized user on the account of a spouse, parent, or sibling. Recently, however, we have heard that authorized user accounts are no longer factored into a person’s credit score, and will not help increase a credit score. What is true? Help!”
Data Facts answers: The designers of the credit scoring formula model (FICO) meant for authorized user accounts to be utilized for a person with good credit and a long credit history to be able to assist their children, spouses, or siblings with their credit history. When an account holder adds another person to their account as an authorized user, that person gets all the benefit of the good payment history. In lots of cases, this dramatically increases a person’s credit score.
Sneaky people began to exploit this practice. Websites popped up selling “piggybacking”. A person with less than stellar credit history could be added to a complete stranger’s credit, and artificially boost his score. These websites charged thousands of dollars, and paid people with good credit to add dozens of stranger’s names to their credit accounts!
In an attempt to eliminate this practice, the credit score model builders for Fair Isaac originally decided that their new scoring model- FICO 08- would NOT consider authorized user accounts in the formulation of the credit score.
After further research, however, they reversed this decision. Eliminating authorized user accounts would wipe out millions of consumers’ credit scores who utilize the authorized user status legitimately (they are authorized users on their parents’, spouse’s, children’s, or siblings’ accounts). The model builders decided to allow the authorized user status to still be figured into the credit scores. (Keep in mind the model builders have added additional- although undisclosed- measures that will close the piggybacking loophole).
Allowing authorized users accounts to be figured into the credit score is great news to millions of consumers who maintain that status legitimately. However, if you are an authorized user, try to follow these tidbits of advice:
- Make sure the main account holder has a good credit history. An authorized user does not need to be on accounts that have just been opened, or accounts with late payments or high balances. The goal is to use the account to boost a credit score. A credit line that is new, paid late, or almost run to the limit will most likely result in the score dropping.
- Open at least some accounts in your name. While an authorized user designation does figure into the credit score, some lenders remove those accounts from consideration during lending decisions. Consumers should realize it’s risky to rely on authorized user accounts for their entire credit history. It is recommended that consumers be a main or joint borrower on at least a couple of credit lines.
- Be sure you trust the main account holder. If the main account holder begins paying late or runs up the balance, your credit will be affected (remember, however, an authorized user will not be responsible for the debt). Make certain the account holder is someone you trust to make good financial decisions before becoming an authorized user on their account.
When employed correctly, the authorized user designation continues to be a helpful tool which consumers can utilize as a boost to their credit history. It is not a long-term solution, and should be used as only one small portion of the credit building plan.
~~Susan McCullah is the Product Development Director for Data Facts, a 23 year old Memphis-based company. Data Facts provides mortgage product and banking solutions to lenders nationwide. Check our our website for a complete explanation of our services.