A reader recently asked a question about her credit score. It’s a question I’ve heard many times in the past and it had to do with being an authorized user on a credit card. Here is the question that Kelly asked:
"I just added my husband as an authorized user on a credit card that reports monthly to all credit bureaus, so I was wondering if that will show up on his report by May 1st. We are trying to buy a home and only need four points increased on his score to get approved and I was wondering if that would do it. Please help asap."
What is an authorized user?
The primary account holder on a credit card can add a number of authorized users to the account. Each authorized user will receive his or her own credit card with his or her name on it. They will be able to make purchases with the card, dispute charges, report a lost or stolen card, and even make payments on the account.
There are some privileges that an authorized user does not have. For example, an authorized user cannot close the account, increase the credit limit, or change the contact information for the primary cardholder. Beyond these limitations, however, an authorized user can generally use the card much like the primary account holder.
It is common for family members to be added as authorized users. There are limits to the number of authorized users that can be added to a credit card. For example, the Chase freedom card limits the number of authorized users to five. The Discover it® Cash Back limits the number of users to nine. Finally, it is important to note that the authorized user is not financially responsible to pay for charges made with the credit card.
Affect on credit scores
And now to the big question. Will an authorized user's credit score be affected by virtue of being added to the credit card account? The answer is yes.
For example, here is what the Chase freedom website says about authorized users: “Reference to the account may appear on the authorized users’ credit reports.”
Capital One has a similar notice in its terms and conditions: “Even though the authorized user does not have financial responsibility for the account, credit data is still reported to the credit bureaus on the authorized user (except on Small Business accounts).”
This question was also asked on the myFICO forums, and the same answer was given:
And finally, FICO has made clear that authorized user accounts are a factor in the FICO formula, including the FICO 8 formula:
"Every generation of the FICO score formula has included authorized user credit card accounts when calculating a person's score. FICO 8 score continues that policy. This can help people benefit from their shared management of a credit card account. It also helps lenders by providing scores that are based on a full snapshot of the consumer's credit history."
The Risks of Being an Authorized User
For many, being an authorized user is a great way to build credit. It’s important to recognize, however, that there are some risks involved. If the primary account holder fails to pay the card on time, the authorized user’s credit can take a hit. Likewise, if the card is maxed out, your score can go down because your credit utilization is high. So the key is to understand the risks before being added as an authorized user.
What About Piggybacking?
Piggybacking is the practice of adding an authorized user to an account for the sole purpose of improving their credit. Typically the cardholder and the authorized user do not know each other, but are brought together by an intermediary in the business of credit repair. The practice usually involves the authorized user paying a fee to the cardholder. The authorized user can’t use the card, but they get the benefit of the card holder’s good credit.
Does it work? Generally, no. Although they don’t provide details, the folks at FICO have developed a way to distinguish when a cardholder adds a friend or family member to an account versus what FICO calls tradeline renting:
"To protect lenders and honest consumers, the FICO 8 formula substantially reduces any benefit of so-called tradeline renting. That's a credit repair practice that entices consumers into being added to a stranger's credit account in order to misrepresent their credit risk to lenders."