Data Facts Answers Question About Authorized User Accounts

Question:  “In the past, our mortgage company has encouraged borrowers who have either little credit or are rebuilding their credit to become an authorized user on the account of a spouse, parent, or sibling. Recently, however, we have heard that authorized user accounts are no longer factored into a person’s credit score, and will not help increase a credit score. What is true?  Help!”

Data Facts answers: The designers of the credit scoring formula model (FICO) meant for authorized user accounts to be utilized for a person with good credit and a long credit history to be able to assist their children, spouses, or siblings with their credit history. When an account holder adds another person to their account as an authorized user, that person gets all the benefit of the good payment history. In lots of cases, this dramatically increases a person’s credit score.

Sneaky people began to exploit this practice. Websites popped up selling “piggybacking”. A person with less than stellar credit history could be added to a complete stranger’s credit, and artificially boost his score.  These websites charged thousands of dollars, and paid people with good credit to add dozens of stranger’s names to their credit accounts!

In an attempt to eliminate this practice, the credit score model builders for Fair Isaac originally decided that their new scoring model- FICO 08- would NOT consider authorized user accounts in the formulation of the credit score.

 After further research, however, they reversed this decision. Eliminating authorized user accounts would wipe out millions of consumers’ credit scores who utilize the authorized user status legitimately (they are authorized users on their parents’, spouse’s, children’s, or siblings’ accounts). The model builders decided to allow the authorized user status to still be figured into the credit scores. (Keep in mind the model builders have added additional- although undisclosed- measures that will close the piggybacking loophole).

Allowing authorized users accounts to be figured into the credit score is great news to millions of consumers who maintain that status legitimately. However, if you are an authorized user, try to follow these tidbits of advice:

 – Make sure the main account holder has a good credit history. An authorized user does not need to be on accounts that have just been opened, or accounts with late payments or high balances. The goal is to use the account to boost a credit score. A credit line that is new, paid late, or almost run to the limit will most likely result in the score dropping.

–  Open at least some accounts in your name. While an authorized user designation does figure into the credit score, some lenders remove those accounts from consideration during lending decisions. Consumers should realize it’s risky to rely on authorized user accounts for their entire credit history. It is recommended that consumers be a main or joint borrower on at least a couple of credit lines.

–  Be sure you trust the main account holder. If the main account holder begins paying late or runs up the balance, your credit will be affected (remember, however, an authorized user will not be responsible for the debt).  Make certain the account holder is someone you trust to make good financial decisions before becoming an authorized user on their account.

When employed correctly, the authorized user designation continues to be a helpful tool which consumers can utilize as a boost to their credit history. It is not a long-term solution, and should be used as only one small portion of the credit building plan.

~~Susan McCullah is the Product Development Director for Data Facts, a 23 year old Memphis-based company.  Data Facts provides mortgage product and banking solutions to lenders nationwide. Check our our website for a complete explanation of our services.

Credit Scores and Why You May Not Have One

So, you want to buy a house, car, boat, or some other item that requires monthly payments. One of the first actions a lender will take will be to pull your credit report and look at your FICO credit score. Your approval and terms of the loan depend heavily on these numbers.

What if you don’t have a credit score?!?

Not having a credit score is not the end of the world, and about 50 million people fall into this category.  There are several reasons why you may not have one.

1. You are young. Jennifer just graduated from college. She has no credit cards and her car loan is in her parents’ name. She does not have a credit file, so she has no credit score.
2. You have always paid in cash. David subscribes to the policy that if you cannot pay for it, you don’t need it. He has always paid cash for his cars, he rents an apartment, and he doesn’t use credit cards. The bureaus would have no record of David, and he would not have a credit score.
3. You paid off all your loans last year. This is frustrating but true. If you have paid off your car, house, and credit cards and live a life of no debt (sigh, you are so fortunate), then your credit report would not be updated with any new information. Because of this, you may no longer have a credit score.
4. You are dead. Ok, I added this one to see if you were paying attention. However, sometimes a creditor will report you as deceased, and this wipes out your credit score. This can happen in situations where a person is an authorized user, or co-borrower with another person, and the other person on the account dies. The creditor may report to the bureaus that the owner of the account is deceased. As a result, you would show as deceased, and you would not have a credit score.

If you are one of the millions of people who do not have a credit score, there are steps you can take to build your credit file which will generate a score.

Open a credit card. This is a great way to begin building your credit. By opening a credit card and using it monthly, the creditor will report this usage to the bureaus. They will start a credit file on you and collect your payment habits. After about 6 months, there will be enough information available to generate a credit score for you.

Be an authorized user.  Your parents, spouse, siblings, or friends can add you to one or more of their accounts as an authorized user.  This allows you to take advantage of the credit history that they have built up on the account. An authorized user status will help generate a credit score faster than opening a credit card on your own. HOWEVER; make sure that the account is in good standing (no late pays, balance is low), or the resulting credit score will not be great.

Break out the unused credit cards. If you are debt-free, you can still use your credit cards every month or so and pay the balance off at the end of the month. In order to have a credit score, you must have one credit line that has updated within the last 6 months. This works even if you pay off the balance every month. So, charging dinner or a tank of gas every now and then will keep your score active and alive.

Go nationwide. Small community banks and credit unions may not report to all 3 credit bureaus. If you already have credit, do a little research on your creditors to see if they report to the bureaus.  If not, then your credit line with them is not helping to build your credit score.

Check your credit. Pull your credit report at www.annualcreditreport.com to see what is showing up on your report, and if there are any errors. If an item is reporting incorrectly, or you are showing as deceased, get that corrected immediately.

Making sure you have a credit score takes a little effort. However, by taking these actions into consideration and implementing them into your financial life, you will be on your way to a great credit score!