What Is an “Authorized User” Account?
Authorized users are people who are authorized to use credit cards owned by a primary account holder with an issuing bank or lender. Many people, who are authorized users, have the accounts for the purpose of boosting their credit history and score. When using authorized user accounts as a personal credit building strategy, it’s important to understand that it’s not recommended that an authorized user actually have access to the credit card. The purpose of this strategy is for the credit card account to report to the authorized user’s credit history to build their credit score using the primary account holder’s established credit history—not to use the card. The primary account holder should request a card with the authorized users name on it and shred it.
Who’s a Good Candidate for Authorized User Accounts?
If you’re an entrepreneur or small business owner in need of capital and you lack an established credit history (or a significant amount of positive accounts reporting), setting up an authorized user account could make sense for you. More often than not, raising capital (especially debt financing), requires a well-established, well managed credit history. As long as you are able to find a creditworthy primary account holder who’s willing to allow you to “piggyback” off of them, you may be able to increase your personal credit score in a relatively short period of time.
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Key Facts about Authorized User Accounts
There are a few key facts that you should know about authorized user accounts if you are considering using this strategy to increase your personal credit scores:
- Anyone can become an authorized user on a credit card account as long as the primary cardholder agrees. It does not matter how long each party has known each other or their relation.
- Depending on the lender, a primary account holder may be able to add up to 20 authorized users to a single credit card account. It’s best to ask the lender how many they will allow to get a definite answer.
- An authorized user’s personal credit will never have any effect on the primary account holder’s personal credit history. The authorized user only inherits the credit card account from the primary account holder.
Please Keep This in Mind
The authorized user strategy can work very well for someone who’s trying to increase their credit score and history. However, it can backfire if the authorized user begins using the actual credit card. It can also backfire if the primary account holder begins making late payments. Those late payments will begin reporting to the authorized user’s credit history but can be removed immediately after removing the authorize user from the account. Therefore it’s critical that (a) the authorized user NEVER use the actual credit card and (b) the primary account holder manage the account properly so it’s never paid late or over-utilized.
The Information Needed to Setup an Authorized User Account
When a primary account holder approaches a lender to add an authorized user to their credit card account, the lender will ask them for specific information. Authorized users are typically required to supply lenders with the following:
- First and Last Name
- Social Security Number
- Date of Birth
Some lenders will not ask for the authorized user’s social security number and in this case you would volunteer the information to guarantee that the credit card account will report to their personal credit history. They may also ask for an address and employer however that is rare. It’s most important to supply them with the name, social security number, and date of birth of the authorized user.
How to Choose the Right Primary Account Holder for Authorized User Accounts
Choosing the right primary account holder can be quite difficult. As I stated in part one of this blog series, it’s ideal to find a primary account holder is can prove they know how to effectively manage their credit. As an authorized user, you’ll want to “piggyback” off of someone who has stellar credit. In addition, you’ll want the credit card account to be at least 5 years old, 10-20+ years is even better. It’s also important that the credit card account have a low balance (preferably below 15% of the total available credit limit). This is because maxed out credit lines (i.e. credit cards with 30% or more of the total credit limit utilized) will do nothing to help your credit as an authorized user. Lenders see maxed out credit lines as a red flag. Lastly, you’ll want to make sure there are not a significant amount of late payments on the account. There should be no late payments in at least the last two years. The primary account holder should have a stellar payment history.
How to Choose the Right Lender for Authorized User Accounts
When choosing a primary account holder, it’s also important to ask what lenders they have credit card accounts with. This is because some lenders may not report authorized user accounts to the credit bureaus. The best way to determine whether or not a lender reports authorized users to the credit bureaus is to pay attention to what information the lender asks for when the primary account holder requests that they be added. If they don’t ask for the date of birth and social security number of the authorized user, chances are they won’t voluntarily report the account to the person’s credit history. Historically, the best lenders for this strategy have been Capital One, Bank of America, and Citi Bank. It will work with other lenders, but the strategy is almost a slam dunk process with the aforementioned lenders.
The Benefits of Authorized User Accounts
The major benefit of becoming an authorized user on an existing credit card account is that it can increase your personal credit score and improve your credit history, enabling you to better qualify for debt financing for your small business. If you are lucky enough to inherit a credit card account that has an excellent payment history, your credit score will skyrocket! Payment history makes up 35% of your overall credit score, so finding a primary account holder with a stellar payment history is an absolute must. In addition, it is important to make sure that the credit card account has a low balance. High credit card utilization is a huge red flag for lenders (as I explained in part two of this blog series). Lastly, finding a primary account holder with a seasoned credit account is just as important. The age or length of your credit history makes up 15% of your overall credit score. Lenders focus on the longevity of your credit history as well as the payment history to determine whether or not you are a creditworthy borrower. In a nutshell, the major benefits that can be experienced with an authorized user account are:
- Added longevity to your credit history.
- Diversity in the types of accounts reporting to your credit history. (It’s important to have a mix of credit accounts reporting on your credit history including loans and credit cards. Your mix of credit accounts makes up 10% of your credit score).
- Increased credit score.
- Greater ability to borrow (i.e. a greater chance for approval).
- Increased choices when looking for a lender to borrow from.
Can Authorized User Accounts Work for Me?
Absolutely! This can work best if you follow the guidelines we’ve given you in this blog They key is finding a primary account holder with stellar credit who’s willing to add you as authorized user. It’s also important to make sure that the authorized user account will actually report to your credit history. Be sure to tell the primary account holder to volunteer your date of birth and social security number to the customer service representative when they contact the lender to have you added as an authorized user. Even if the rep doesn’t want to accept the information, volunteer it anyway. If they still don’t want to take the information, hang up and call back until you get a rep that will add the information. That is the most critical component in the setup of this strategy because the accounts need to report to your personal credit if they are going to positively influence your credit history. The lender must have your social security number to report the account to the credit bureaus.
I’ve Heard Authorized User Accounts are Becoming Worthless: Is This True or False?
In recent years I’ve heard the rumor that authorized user accounts are becoming worthless due to the release of FICO ’08. However, there isn’t any solid evidence that this is true. There may be some ability for lenders to detect inauthentic authorized user accounts using the FICO ’08 model but there is no concrete proof that this is fact. Most lenders use FICO scoring models to determine the creditworthiness of a borrower, however the good news is that not all of them are using the FICO ’08 model as of yet. Therefore it still leaves time for millions of people to benefit from using the authorized user strategy. As long as it is setup properly, your personal credit history and score will be positively impacted, increasing your chances of qualifying for debt financing for your small business.