Build Credit: New Credit Lines vs. Authorized User

“It takes credit to build credit.”

This statement is all-too-common and a big reason for why many new borrowers turn to relatives for help. The method of becoming an authorized user to build credit is nothing new. In fact, many parents put their children down as authorized users on their own credit cards for this exact reason.

But, is the authorized user route really better than trying to build credit with new credit lines or is this all just a mirage?

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Credit Lines & Authorized Users, What’s the Difference?

A credit line is a fresh account — this could be a credit card, loan, line of credit or something else. An “authorized user” is merely someone placed on your account for the purpose of permitting them to access your credit line.

Why Add an Authorized User?

In most cases, this is done so multiple individuals can legally share a credit card. The example of a child accessing a parent’s funds is a common scenario. Many spouses will also do this, especially if only one has good credit.

Next, some people choose to add authorized users to their accounts to help the other person build their credit. This technique is debated heavily and for good reason, but it can be effective if the circumstances are right. Even so, it’s important that the primary account holder knows what they are getting into before they help.

Does an Authorized User Hurt Your Credit?

Co-signing for a home loan will potentially destroy the co-signers credit score. The impact is not so extensive when merely adding an authorized user to an account. But there is still a majority similarity between these two situations because the main borrower is extending trust to the authorized party.

The primary account holder does take on an inherent risk, but not in the same sense as with co-signing a loan. There will be no credit score damage for the act of adding an authorized user. The problem comes as a result of the authorized user being irresponsible — for example, the primary cardholder’s score will drop from late payments.

Can Authorized Users Build Credit This Way?

Many credit card issuers will report authorized users to the credit bureau. These entries will not show the same as they do for the primary borrower. Positive behavior will look good and influence a better credit score in the long run. Negative behavior will do the opposite and can drag down the authorized user’s credit score too.

Furthermore, it’s important to look at just how damaging an authorized user can be for the primary account holder. The best way to understand this is by looking at how a person’s FICO score is calculated in the first place. Here’s the breakdown for the vast majority of FICO scores that exist:

  • Payment history (35 percent)
  • Amounts owed (30 percent)
  • Length of credit history (15 percent)
  • New credit (10 percent)
  • Credit mix (10 percent)

For the primary borrower, the biggest drag here happens with the “amounts owed,” particularly when an authorized user maxes the card. The utilization rate will hit 100 percent for this card and will ultimately lift the total credit utilization rate between accounts. The primary holder will feel obliged to pay off the debt for the authorized user — and if they don’t, their credit score could decline as a result.

For the authorized user, there’s not much to complain about when considering the scoring metrics above. The biggest issue arises when the primary account holder needs to extract funds from the card. This action could make it seem that the authorized borrower has a really high utilization rate, even when it’s not their fault. The other variables, such as new credit and payment history, are not as important and are a non-factor when there’s no borrowing history.

The Better Option: Build Credit With a Credit Card

The faster way of obtaining a higher credit score is by establishing credit lines directly under yourself. Forget about the authorized user option and begin building your score with a basic credit card.

Believe It or Not, Secured Credit Cards Rock!

Here’s a good idea: Go for a secured credit card and plop down a $1,000-$3,000 collateral. Make sure it’s a card that offers conversion to unsecured after you prove that you are a responsible and trustable borrower.

Why? Because a higher credit limit helps and makes it less difficult to be active with your card without triggering a high utilization rate. This factor is very important because your debt-to-credit ratio weighs heavily on your FICO score. In fact, 30 percent of your credit score comes down to this single variable.

Conclusion

Building your credit can be difficult when you have no history to show a card issuer or lender. Having someone who will put you down as an authorized user can often help, but only if the creditor reports you as well. Be careful before getting into any of these situations — and if you want quicker results, set up your own credit lines instead.

Sources:

http://www.creditcards.com/credit-card-news/credit-utilization-fico-1270.php

www.nerdwallet.com/blog/credit-cards/credit-card-secured-unsecured-change-switch/

https://wallethub.com/edu/authorized-user/24717/

http://blog.ovationcredit.com/2017/03/understanding-your-credit/