The Credit.com Forum recently saw this post about how credit scores consider authorized users on credit cards:
Is Dave Ramsey right about authorized users?
“I saw that this was published through several sources within the last week. I thought being an authorized user could at times be beneficial to the authorized user….”
Nationally known author, radio host, and advocate for people getting out of debt, Dave Ramsey recently posted the transcript of a call from his radio show, Authorized Users Don’t Help Your Credit, citing his 60 employees using his debit card as an example of how being an authorized user on a card won’t affect your credit.
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While Dave does a great job of helping people get and stay out of debt, his answer to the caller about how authorized user accounts may or may not impact credit scores unfortunately missed the mark, particularly where FICO credit scores — the ones used in most lending decisions — are concerned.
First, what’s an authorized user? This is someone who has been given permission to use a credit card by the primary cardholder. In most cases, authorized users are not contractually responsible for the charges — even their own — and are typically spouses and other family members, although they can also be significant others, friends, or just about anyone.
What Dave doesn’t seem to be aware of is that an authorized user will see that account on her credit report, along with all of her other credit information, and that the account will, in most cases, be included in her FICO credit score.
In response to Dave’s caller, the answer I would have given would have been that her brother could boost or hurt his score by being added to her account, depending on the status of her account and his overall credit standing.
For instance, if she has had the account for many years without any late payments, and has kept the balance low, his score could improve after being added. However, if she has any recent late payments or high credit utilization (balance/limit ratio) on the account, her brother’s score could actually drop after he’s been added as an authorized user if his credit report shows, for example, no recent late payments, or if he has cards with lower credit utilization than his sister’s account.
Where Dave is right on the money, though, is in his advice that the caller should be careful not to let her brother do “stupid things” with the card. If he does, she’s on the hook for his charges, and will probably be stuck with a lower credit score. For these reasons, if she does add him as an authorized user, she should not give him a card. This way his score can benefit while she maintains full control over the account.
But what about Dave’s 60 employees whose scores are not affected by being authorized users on his debit card? Simple. Unlike credit cards, debit card accounts don’t appear on credit reports. And if an account isn’t on your credit report, it’s not in your credit score.
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Image: Laughlin Elkind, via Flickr