Last week I received a fantastic credit score improvement question from one of my Twitter followers.
His question (paraphrased) was, “Hi John, would my credit score improve by having my name added as an authorized user on my father’s Sears credit card or would it be better to get a secured credit card of my own?”
This is a fantastic question for a couple of reasons. First, the “authorized user” strategy remains the most common way young people establish credit reports and scores. And second, the effectiveness of the authorized user strategy has changed over the past few years.
What’s The Authorized User Strategy?
First things first, what’s the authorized user strategy? An authorized user is someone who is added to an existing credit card account as someone who can use the account, but has no contractual liability for the payment.
The authorized user gets a card with their name on it, but cannot make changes to the account. They have full access to the card’s credit limit, but they don’t get the bill at the end of the statement period. It’s like having a credit card with training wheels.
Credit card issuers commonly report the credit card account to the credit reports of the authorized user. And, if the account is old, has a clean payment history and a low balance relative to the credit limit, it can help to establish a strong credit report and credit score for the authorized user.
I established a credit history by becoming an authorized user on one of my father’s credit cards back in 1987 and tens of millions of others have done the same thing.
Strategy As Compared to Secured Credit Cards
Another way to establish or rebuild your credit is by using secured credit cards. Getting a secured card requires you to place a deposit with a bank. The bank then issues you a credit card with a credit limit equal to your deposit.
You can open a secured card with a deposit of as little as a few hundred dollars. And yes, most secured credit cards are reported to the major credit reporting agencies: Equifax, Experian and TransUnion.
While the secured credit card strategy can be effective when building credit, it’s not nearly as effective as the authorized user strategy. When you’re choosing between the two options, keep in mind some of what’s important to a FICO credit score — a low balance relative to the credit limit and the age of the account.
By having your name added to a parent’s or spouse’s existing credit card, you put yourself in a better position to earn a lot of points from those two measurements.
The account that you’re being added to is probably not a new account, which means you’re adding an aged account to your credit reports. And, if you’re having your name added to a general use unsecured credit card, you’ll likely benefit from the card’s credit limit, which is likely several thousand dollars or higher.
Opening a secured credit card means you’re adding a newly opened account to your credit reports. It also means the credit limit is likely to be very low. It’s not often that people deposit thousands of dollars with the bank just to get a significant credit limit.
Finally, because you’re opening a new account, the bank is going to pull one of your credit reports. That means, you guessed it, a new credit inquiry on one of your credit reports. And that’s never a good thing.
The Bottom Line – Authorized User Is The Better Strategy
So when it comes to choosing between the authorized user and secured credit card strategies, it’s really not a fair fight. You’re going to benefit much more by having your name added to an existing credit card rather than opening a new secured card. But, you’ll want to make sure you have a legitimate relationship with the primary cardholder who adds you to their account.
In FICO’s latest generation of credit scoring models, they have logic built within that tries to identify someone who is simply trying to game the system by piggybacking on some stranger’s credit card.
Piggybacking was a popular credit repair strategy about 5 years ago. Credit repair companies would sell access to high credit limit credit cards for a fee. You’d pay them hundreds or thousands of dollars and they’d add your name to a stranger’s credit card account as an authorized user.
When FICO caught wind of that credit repair strategy, they modified their newest models and if they believe you’re trying to beat the system by piggybacking, you won’t get the value out of that card. So, stick to having your name added to the account of a parent or spouse and you should be just fine.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.