Authorized User Accounts – Not All Bad…Not All Good…

Historically, adding a family member as an authorized user to an existing credit card with good credit history was a great way to help or improve the family member’s credit. This much utilized (sometimes over-utilized) practice can improve an authorized user’s credit, but it may not help
the family member secure a mortgage loan.

Some lenders are now requiring the removal of authorized user accounts before they will approve a loan since the credit report and score is not an accurate reflection of the borrower’s own credit history. Due to the fact that an authorized user is not responsible for, and usually
does not make payments on the credit card, the removal of these accounts could mean a loss,or dramatic decrease of their credit scores and possibly denial of the loan.

Over the years, “piggybacking” (the use of someone else’s credit as an authorized user) has become frowned upon by mortgage investors. Some authorized users have actually paid individuals a fee to use that person’s good standing accounts on their own credit file. To be added as an authorized user on someone else’s account can cost anywhere from $500 to $5000 depending on the history of the card. This practice has given authorized user accounts a
bad name.

Adding a family member as an authorized user should be a stepping stone to help them establish credit, but not a long term solution. Once the authorized accounts have helped them establish new credit and credit scores, this person should start establishing credit on their own.Secured credit cards or secured lines of credit are an excellent way to build credit. Most gas cards and department store credit cards are other ways to build credit. It is important to make payments on time and keep balances low – preferably below 25% of the high credit limit. And it is best to establish two or three credit cards in their name.

Once credit has been established in their own name, it is wise to have the authorized accounts removed from their credit. The credit account holder (those responsible for payment on the account), will need to make the request to the creditor for the removal of any authorized users.

Many buyers may not be aware of the importance of establishing credit in their own name. If done correctly and with proper planning, new home buyers won’t have as many credit related hurdles to jump over when it’s time to purchase that new home.