This credit tool is best saved for a few case-specific scenarios.
Most people don’t realize how harmful it can be to add someone as an authorized user to your account. Likewise, becoming an authorized user on someone else’s account might not help your credit score or future loan approvals. In fact, it could hurt you in the long run.
Understanding how being an authorized user can affect your credit is important, because your actions as well as how you manage others’ accounts can have negative consequences.
Let’s take a look at how authorized users work, whether you should trust the people involved in the process, and the risks of becoming or adding an authorized user. It’s better to avoid it altogether than to do it incorrectly because the dangers can be serious for everyone involved.
How Authorized Users Work
An authorized user (AU) is someone allowed to use a credit card, even though they are not the primary account holder or responsible for the payments. You can either add an authorized user to your account, or you can be added as an authorized user to someone else’s account.
It’s important not to confuse authorized users with joint account holders, where both people are responsible for paying the bills. An authorized user is able to make purchases but is not responsible for paying the balance (although they are allowed to—credit companies will take bill payments from anyone).
Many people believe that being an authorized user will improve their credit score, but that’s not always true. With newer versions of FICO software, an authorized user might see a small boost in their score, but in the long run, credit score is less important than most people think.
Your credit score mainly affects the interest rate and terms of loans, not whether you’ll be approved. Lenders don’t approve high-value loans like credit cards, car loans, or mortgages just because you have a good score. Instead, they look at your borrowing habits, which are reflected in your credit profile. Although your score might rise a little, it won’t necessarily make you more “fundable” (qualified for loans).
Personal vs. Business Accounts
You can have authorized users on both personal and business accounts, but the risks are high when you allow someone to be an authorized user on your personal account. On the other hand, authorized users for business accounts have different rules, and business partners are often authorized users on corporate accounts.
Trusting the People Around You
Whether you’re dealing with personal or business accounts, it’s essential to trust everyone involved with your credit accounts. A parent who makes their college-age child an authorized user on a credit card for use in an emergency may be one of the few situations where adding someone as an authorized user might be acceptable.
But even the people closest to you can put you at risk. Before you add someone as an authorized user, make sure they keep a low balance on their card (a high balance can hurt your credit) and that they pay their other bills on time. If they miss a payment on one of their other accounts, it can negatively impact the account to which you’ve added that user. Imagine if a child made a mistake on your account—they might keep it secret until they realize the damage it caused to your credit.
Here’s a story to illustrate this point: A company was helping a client who wanted to qualify for a Chase credit card. The client worked hard to improve his credit and after a lot of effort, he was approved. He was thrilled. However, things took a turn when he shared his success with a friend. He added his friend as an authorized user on the new Chase card. Unfortunately, the friend had poor credit. Within a month, the account was shut down because the friend’s credit history was a problem. This caused the client to lose the credit card he had worked so hard for. If he had consulted with someone knowledgeable before adding his friend, he could have been warned about the risks.
This story shows that even good friends and family can cause problems if you trust them with your account. Your credit is constantly monitored by underwriting software, which tracks all authorized users, so their actions can directly affect your credit. Be careful about who you trust with your accounts because it can harm your ability to get loans or credit in the future.
The Risks of Being an Authorized User
Being an authorized user carries a lot of risks, with very few rewards. FICO doesn’t give much weight to authorized users: only around 40% of the points the primary account holder gets. This means the authorized user only gets a small boost, but if the account goes into delinquency or is charged off, the negative impact affects both the primary cardholder and the authorized user equally.
If the account is late, goes into collections, or gets charged off, both the primary account holder and the authorized user will be negatively affected. The software doesn’t distinguish who made the payments or charges; it just sees both people as equally responsible for the account. That being said, even if the authorized user is the individual making the payments, the account owner is the only one who would receive the credit.
Because of this, being an authorized user is high risk and low reward. If you’re the primary account holder and you know you’ll be late on a payment, remove the authorized user from the account to protect them from the consequences.
Avoiding Fraudulent “Trade Lines”
It’s also risky to purchase a trade line—a practice where businesses sell access to “clean” credit accounts to people looking to improve their scores. These businesses don’t tell their customers that the trade lines belong to strangers. If you don’t know the person behind the account, how can you trust them? This is one of the many risks involved in being an authorized user.
Protecting Your Credit
When it comes to authorized users, there are many risks you should consider. Although it might seem like a good way to help someone or boost your credit, it can harm you in the long run. Always be cautious about who you trust with your accounts and remember that the benefits of being an authorized user are minimal compared to the potential negative consequences.
Instead of relying on trade lines or becoming an authorized user, focus on improving your credit profile through responsible borrowing and timely payments. It may seem selfish, but protecting your credit is more important than trying to help someone else with theirs. Being careful now can help you avoid major problems later.
0 Comments