Welcome back to part 4 of our Credit Cards 101 series. We have already covered in depth how properly used credit cards have the ability to help you start building credit from scratch or to rebuild previously damaged credit reports. Credit cards alone are not going to be a cure-all for your credit problems, of course, but they can be an important component in your overall credit restoration plan.
When it comes to credit cards an often overlooked credit improvement method is the authorized user strategy. Here is a deeper look at how the authorized user strategy works and how you might be able to benefit tremendously from asking a loved one for a favor.
What Is an Authorized User?
Becoming an authorized user allows you the ability to have your name added to someone else’s existing credit card account. You are typically not legally liable for the debt as you would be if you were a joint account holder or co-signer. However, you can make purchases on the account if you wish (and if the primary account holder allows you to do so).
How Your Loved One Can Add You to an Account
The process begins when you ask your loved one to add you as an authorized user on an existing credit card account. Your loved simply needs to call his card issuer’s customer service department to place the request. Once you are added to the account the primary card holder will be sent a new credit card with your name on it shortly thereafter, usually within just a few days. Your loved one can keep the card or give it to you – it will be his choice.
How an Authorized User Account Might Help Your Credit
Authorized user accounts are one of the most effective ways to build credit from scratch and they can be extremely helpful when rebuilding damaged credit as well. When your friend or family member adds you as an authorized user the account will generally be reported to the 3 credit bureaus, thus showing up on your 3 credit reports, with a few months.
It is worth noting that some credit card issuers will not report account activity for authorized user accounts to the credit bureaus and, in those cases, an authorized user account would not help your credit. However, the common practice among card issuers is to report. Your loved one can always check with his credit card issuer first to inquire regarding their credit reporting policies concerning authorized users.
Once the account is added to your credit, your credit scores could potentially begin benefiting almost immediately. If the account is older it could help to increase your average age of accounts and, possibly by extension, your credit scores. If the account has a high limit and a low or zero balance then the account could potentially benefit you by lowering your aggregate revolving utilization ratio as well. However, you should be aware that being added as an authorized user to the wrong credit card account could possibly harm your credit scores instead of help them.
If you are added to a young account, for example, then it could lower your average age of accounts, thereby potentially harming your credit scores. If the account has any late payments in its history that could spell major trouble for your credit scores. Additionally, if the account has a high balance to limit ratio then you could be in for a negative credit score impact as well. If you find a loved one who is willing to add you to a credit card account just be sure that the account has always been paid on time, has a low balance, and is preferably a bit older before they give their credit card issuer a call to do you the favor.
Watch Out for the Scam
You should be aware that there are numerous online companies who will broker an arrangement, for a hefty fee of course, between you and a stranger to be added as an authorized user on an account owned by someone you do not know. This practice is known as piggybacking or tradeline renting. Renting tradelines from strangers in an attempt to game the credit scoring system can land you in some seriously hot water. Unless you want to risk being guilty of bank fraud then you should avoid this shortcut at all costs.