There are two sub-levels of credit card ownership and usage, authorized users, and cosigners.
Being an authorized user of a credit card is different than being a cosigner. As an authorized user, you may be afforded the ability to purchase items on the card as if you were the actual account holder (some credit cards allow the account owner to set lower credit limits for authorized users). The authorized user is under no legal obligation to pay back the credit card company for any charges incurred. All responsibility for paying back the credit card charges falls on the account holder(s).
As a cosigner on the credit card (joint account), you and the cosigner are both responsible to ensure the credit card statement is paid as agreed. If one of you fails to pay, the other person must pay the bill or you will both have negative marks on your credit report.
Adding a teen as an authorized user.
Giving your teenage child access to your credit card account might make you squirm, but there are some good reasons to do it. Teens need to be educated about credit before they leave the nest and get their own credit cards. While you could just hand them your credit card whenever they want to make a purchase, there are extra benefits to making them an authorized user on your account. There are also many pitfalls to adding an authorized user as well.
If the account does appear on your credit report, how much it will affect your credit scores depends on the credit scoring formula, Your payment history will always be the most important factor in your credit scores. If the account has never been late, having the account on your report may be beneficial for you, especially if the account has been open and active for quite some time (one or more years) and the rest of your credit history is limited.
The second most important factor is your credit utilization ratio (CUR). In general, the lower your utilization ratio, the better for your credit scores. Your overall CUR is determined by taking the total of all your balances on revolving accounts and dividing them by the total of the credit limits on those accounts. Having even one account on your credit report with a high CUR can affect your credit scores, so you are wise to be concerned
As stated, there are pros and cons to authorized users, or “piggybacking” as the industry calls it. Let’s examine a few of each.
When adding a teen to your credit card as an authorized user, they may not fully comprehend or understand what credit is until they experience it firsthand. To make this lesson effective, you’ll need to establish with your teen that they are responsible for paying the charges they make and any interest they incur. They then gain an understanding of what it means to owe someone money — and that every dollar spent must be paid back. If you simply pay for all their purchases, they’ll learn very little about responsible credit card use.
Once your teen is an authorized user, your card issuer will begin reporting your credit details to the three credit reporting agencies — Experian, Equifax, and TransUnion. Furthermore, because of the CREDIT CARD ACT of 2009, adults under the age of 21 may not qualify for a credit card without a co-signer or proof of income. By making your teen an authorized user early on, you can let them build credit they couldn’t build on their own. This convenience for you and your teen can help you out several ways. If you forget to give them money for any number of reasons: meals, events, school supplies, etc., they can use the card. Things happen, life makes overtures. And when your teen pays off the balance of their charges, and you can discuss with them what is necessary and what is discretionary charges, they learn the value of personal responsibilities, and thus become more responsible. Convenience, building credit, emergencies and excellent financial lessons learned. Quadruple win.
The downside has its own weight. As your teen is an authorized user and not a cosigner, you (the parent or guardian) are responsible and liable for all charges on the card. If this experiment goes real sideways, it could potentially damage your credit in the process. It could damage your relationship with your teen. Possible late payments, default, collections. Sideways.
Building credit is a long road with few shortcuts.
As discussed, becoming an authorized user of someone else’s credit card account is one common strategy for improving credit quickly.
If you’re just starting out and have a thin credit profile, it’s likely to benefit you more than it will someone who’s been using credit longer and has missteps to overcome.
In either case, becoming an authorized user works best when paired with a plan to diligently build credit over time.
When the Great Recession 2008 fell on us like Kihachi Okamoto’s Sword of Doom, an exercise in absurdist financial violence, credit agencies started to complain about allowing consumers to piggyback credit scores. FICO tried to do something about piggybacking, but without government support, it is difficult for the credit companies to keep piggybacking out of the credit score calculations. So, as it stands today, your credit score can be affected, depending on the scoring model. The VantageScore 3.0 model only includes positive information from authorized user accounts. On the other hand, the FICO model includes positive and negative marks from legitimate authorized user accounts but will sniff out anybody who games the system. Basically, FICO wants to make sure you really do know the authorized user. Some credit repair companies (turn my head and spit) have offered a service that lets people pay to do this, and FICO doesn’t like that. and tried to effectively put an end to what they saw as a deceptive practice and manipulation of the system. They later reversed their decision after consumer advocates observed that FICO 08 (what the attempt was known to be called) could unfairly impact women and/or stay-at-home spouses, and lenders’ concerns that using the new model would impede their compliance under Regulation B—which requires lenders to consider credit histories on accounts shared by spouses when assessing a married person’s credit risk. The CREDIT CARD ACT received a similar backlash for discriminating against women early in 2011 for mandating that credit card issuers “consider information regarding the consumer’s independent income, rather than his or her household income” before approving a new card or credit limit increase under the new law.
Dissolving the authorized user relationship is almost just as easy as starting it. Simply call the credit card issuer (or log on to the primary account holder’s online account) and request to remove the authorized user. Their credit card will be deactivated and will no longer work for purchases. However, as I learned the hard way during a post-divorce episode, a cosigner can only be taken off the primary account after the balance of that account has been paid in full.
With prudent, thoughtful application and usage, credit card piggybacking does work, and proactively work for you.
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