One of the most common ways for young people, say teenagers, to build credit is to become an authorized user on one or more of their parents’ credit cards. This way, they immediately have a significant amount of available credit, and by the time they need a credit score after college, they might have a decent number.
Fair Isaac Company, the organization that calculates the official credit scores for the reporting bureaus, is eliminating this method of building credit. While this has been a great strategy for people—if you believe that “building credit” is necessary, anyway—there is one percent of customers who use this strategy in a less legitimate way.
Companies like instantcreditbuilders.com have created a marketplace by connecting those with bad credit with willing participants with good credit, for a fee. The bad credit customers pay a fee to those with the better history to be placed as an authorized user on their credit lines. In the past, this has benefited those with bad credit by increasing their score with no effect to the participants with good credit.
Starting in September, Fair Isaac will be changing the credit score formula, which I described recently, to disregard this piggybacking. Here’s a suggestion from Yahoo Finance on how to gain the same effect once the formula changes.
Families who employ piggybacking to help children or new spouses jump-start their credit have other ways of achieving their goal. Mr. Totaro says joint users on an account, like authorized users, get the benefit of the card’s entire history, but joint users are accountable for the debt on the card while authorized users are not. Additionally, family members with good histories can cosign loans to help loved ones secure credit.
For parents who want to teach their kids about responsible credit usage and want to give them a leg up which can help many years down the line when it’s time to qualify for a mortgage, there are still options. The options aren’t as good, however.
Photo credit: selvin
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10:40 am (reply)
I’m just amazed ANYONE would sell out their credit history the way some people have been doing. It just seems like an awfully big risk—you are selling them authority to USE your credit line even if they then promise not to do so. There may be some safeguards in place (like not revealing to the buyer the card number and expiration date), but the risk still seems huge.
1:42 pm (reply)
I think this is an excellent idea. People should not be getting a leg up as credit-worthy unless they have full access and full accountability assigned to them.
2:00 pm (reply)
“The options aren’t as good, however.” – I’m glad you got that in there, because this definitely opens up a lot of potential dangers. There’s no way my parents would have trusted me as a joint user on their account (and they shouldn’t have).
8:01 pm (reply)
Would the scores be recalculated to reflect the new system? For example, I have a 700+ credit score that is due largely to my 10-year credit history (curtesy of being Mom’s authorized user… or joint user.. actually, I’m not sure.. hmm). Should I now prepare for a lower credit score because the credit card under my own name is only a year old?
10:00 pm (reply)
Wanda: It seems to me that the algorithm will be changed for everyone, so you could very well see your score drop. That’s just speculation on my part.
I suppose there is a possibility that they will “grandfather” those who were authorized users before a certain date to maintain their credit score, but it doesn’t seem likely. It seems more likely that once the new score formula goes into effect, it will affect everyone.
8:27 am (reply)
I’m pleased with the new changes. I don’t think anyone – even someone’s kids – should get to piggyback off their good credit.
I asked for a credit card in high school so my parents wouldn’t have to clothing shop with me. I got a checkbook instead, and the advice that “when your good name is enough to get credit, then you can have it.”
I started with a $500 limit and now have $15K because I knew there was no bailout, I respected it.
10:30 pm (reply)
This is a bummer. When I was a teenager my Dad helped me build my credit by making me an authorized user on one of his credit cards and teaching me all about how to use credit cards to my advantage. (Then he made me run purchasing errands for him. : ) )
I was planning to do the same for my kids.
1:50 pm (reply)
FICO announced yesterday that it has reversed its decision. Jeremy Simon of CreditCards.com wrote a piece on it today. (Disclosure: I’m his boss, and proud of him breaking the story.)