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The Bottom Line on Authorized User Accounts

The authorized user (AU) concept is pretty straightforward. A person with a well managed credit card account can add an AU to his account. The cardholder’s good standing will then have a rub-off effect on his designee’s ability to establish, or in some cases improve, his credit score. The positive impact can be immediate, and it poses little risk to the account holder.

Establishing a Credit History
Authorizing the use of a credit card to teach financial responsibility is not a new concept. Parents have been doing it with their young adult children for many years. When managed properly, it allows a young person to establish a credit history, and it teaches them how to use credit wisely, things that will be important to their financial well being later in life.

When an AU is added to an account, the primary card holder, not the person he has authorized, will typically receive the card. The AU does not have to have the card in his possession, know the account number, or even use the card to benefit. Keep in mind that the card must be issued in the authorized user’s name for it to impact his credit report.

Because parents typically want to teach the AU how to use credit wisely, most set limits and allow the card to be used within those limits. This approach can be both effective and convenient, particularly for young adults attending college.

Rebuilding a Poor Credit Score
While utilizing the AU strategy to build credit for a young adult has been widespread for some time, it has also become an important tool in recent years for helping older consumers who’ve experienced a financial slip and fall to rebuild tarnished scores.

The financial and housing crises have taken a devastating toll on many debtors, who often through no fault of their own, found themselves underwater on their mortgages. The resulting recession, described by most experts as the deepest since the Great Depression, left many without gainful employment and, as a result, the financial means to stay afloat.

Having defaulted on a large debt obligation can cause a person’s credit score to suffer for many years making it difficult to purchase another house, a car or even get a credit card at less than typically exorbitant subprime rates.

If a person with a poor FICO score can find someone whose credit card account is in good standing to authorize use, it is possible to see immediate benefits. As long as the account is properly maintained and payments are made in a timely manner, the person piggybacking should see continual improvement in his scores.

Worth Reiterating
Extending credit card privileges to an AU is a low risk proposition for the cardholder. Credit reports remain unique to each individual named on the account. The account holder will not be negatively impacted by an AU’s poor credit history.

The AU is not allowed to contact the credit card company and make changes to the account or order a new card. Control of the account remains the full province of the of the account holder. It has been likened by some to extending credit with training wheels. Some credit card providers even allow account holders to set spending limits for each authorized user on the account.

Disclaimers
While most credit bureau scoring models incorporate authorized user accounts into the calculation of a person’s score, some do not, and some others some may discount its value in calculating a score due to the fact that the authorized user has no responsibility for repayment of any debt incurred.

The authorized user strategy is not without risk for either the authorizer or the authorized user. Employing the strategy successfully ultimately comes down to trust. The AU needs to make sure he can trust the primary account holder to maintain the account in good standing. In turn, the account holder needs to trust the AU not to abuse the privileges he has been granted.

Bottom Line
The authorized user strategy can be both an excellent way for a young person to build his own credit history and for helping a person with a poor credit score make repairs. It is not a panacea, and it is not without risk, but it can be an important step in the right direction for a person seeking to establish or improve his credit scores.