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
Updated August 9, 2011 and originally published June 12, 2007.
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