4 things authorized users should know
By Miranda Marquit
March 30, 2015
The fastest way to build your credit history is to get a credit card. But what if you don't qualify?
You can get a secured card to help you establish your credit history, which means you put down a deposit in exchange for a small credit limit, but an easier way to begin building good credit is to piggyback on someone else's card as an authorized user.
Why is good credit important? With it, you have access to lower insurance rates, better interest rates, better jobs and even nicer apartments.
And as an authorized user, you can build your credit history without actually applying for credit.
It's an ideal tool for a student who wishes to get a good start with credit. Becoming an authorized user can also benefit a stay-at-home spouse with poor credit. Since a partner with poor credit can't get his or her own card, becoming an authorized user can boost a credit rating. Here are four things you should know before you apply:
1. Who can be an authorized user?
“There are two ways that more than one person can be on a single credit card account,” explains Matthew Coan, founder of Casavvy.com. “They are joint account holders and authorized users.”
Joint account holders are equally responsible for the debt on the card. However, the authorized user is issued a card that he can use as his own, but he is not legally responsible for paying the debt.
Not just anyone can become an authorized user. Thomas Nitzsche, a credit expert with ClearPoint Credit Counseling Solutions, says that an authorized user needs to have a legitimate relationship with the primary account holder. In most cases, this means a parent-child relationship or a spousal relationship. “FICO algorithms can determine if someone is simply trying to work the system to improve their score,” Nitzsche says.
2. When an authorized user benefits
Creditors and credit bureaus choose which information is included on your credit report. “Among the three different credit reporting agencies, there are different ways of reporting, and how much each aspect affects your score,” says Coan. He also points out that credit issuers report information to the bureaus differently. Ask the credit issuer how information is reported so you understand whether or not being an authorized user will be beneficial.
“FICO algorithms can determine if someone is simply trying to work the system to improve their score.”
–Thomas Nitzsche, ClearPoint Credit Counseling Solutions
Here's how it works: In order for an authorized user to benefit from another's card account, the creditor must report the cardholder's name, and the credit reporting agency must include the card's activity in the payment history portion of the authorized user's credit report.
For best results, the primary account holder should be in good standing — meaning no late payments or carrying high balances. Nitzsche recommends encouraging the account holder to keep a low balance on the card. Payments should be made on time and, ideally, in full each month. Before you are added as an authorized user, ask the primary account holder to check his or her credit at AnnualCreditReport.com to ensure that it will benefit you to be associated with his or her credit profile.
As your name is associated with the positive behavior of the credit account, your credit history will be established, and your credit score is likely to improve.
3. When things go wrong
The eventual goal is to establish a credit history that allows the authorized user to open a card later. However, the primary account holder might make a mistake or stop paying. At that point, the authorized user can be negatively affected as two of the three credit bureaus (Equifax and TransUnion) report bad credit habits of the primary account holder on the authorized user's credit report, which will impact his credit score.
The good news is that removing your name from a card account as an authorized user is easy. “Because you are not responsible for any of the debt on the card, you should be able to have yourself removed,” says Coan, just by calling the issuer or having the primary account holder make the removal request.
Removing your name as an authorized user requires contacting both the creditor and the credit reporting agency with the associated records. If the information has been reported to all three agencies, you will need to contact each of them individually. Nitzsche suggests requesting your removal in writing. Send your request (keep a copy for your records) via certified mail to ensure that creditors and credit agencies receive it. “Some creditors have a short waiting period,” says Nitzsche, so plan for that.
You might also need to follow up with the appropriate credit reporting agencies to make sure that your name is no longer associated with the delinquent account. Check with each credit reporting agency to learn the policy on removing your name from a delinquent account. Experian, for example, will completely remove an authorized user's name from a delinquent account upon request. It's vital that you are an authorized user and not a joint account holder, since a joint account holder is equally responsible for the account, while an authorized user is not.
4. Stand on your own two feet
Finally, be aware that the primary account holder can remove you as an authorized user at any time and for any reason. This is one reason for transitioning to your own card as soon as you can. You don't want to be stuck without access to credit.
Periodically check your FICO score at MyFICO.com for about $20, and shoot for a score of at least 700, which is in the “good” range. Once you have reached your goal, only apply for a card that is within your range to increase the likelihood that you are approved. Sending multiple queries at once can negatively impact your score.
Remember, as an authorized user, you are a guest. Use the card the way the primary cardholder wants you to, and pay her promptly when you charge. Build your credit to the point that you can apply for your own account, thank the primary cardholder for her generosity and enjoy the benefits of having great credit.