"But adding someone as an authorized user can be the gift that keeps on gifting. As with most successful credit score improvement strategies, the more time you give this one, the better. ... But the gift isn’t for everyone."
If you have done some things right and your financial house appears in order, a relative will ask you to co-sign a loan for them. Co-signing is only one of the ways available to help your credit-challenged relative. There are other ways that may deliver the desired results with less exposure and risk for you, especially with a little bit of planning.
Let’s look at your options and so you can make an informed choice about co-signing.
When you co-sign you become a JOINT account holder. Each and every member on a joint account agrees to be individually responsible for 100% scheduled repayment of the outstanding debt regardless of the other members' payments or promises. When you co-sign if a payment is missed, your credit score will receive the full negative impact of the late payment.
This could be catastrophic if it compounds an already diminished credit score. No doubt, the new co-signed loan’s high-balance-to-limit ratio, and short history have already reduced your credit scores several points. That happened just by signing up; missed payments or not. So be prepared to take a credit score hit when you co-sign.
How long will it take your score to recover from these factors assuming a pristine repayment history? The answer depends on several factors. Credit scoring is an art and a science. Whatever calculations the algorithm conjures to determine our scores, the following is empirically factual for every credit score. They go down a helluva lot faster than they rebound. It is never down one month; up the next for any credit scoring model in existence regardless of the previous history.
If you do, you will almost immediately transfer your credit history to theirs. And without any risk or exposure to new debt for either of you. Now, this strategy will not work for impulse or emergency “gotta have a co-signer or else “ situations. But adding someone as an authorized user can be the gift that keeps on gifting. As with most successful credit score improvement strategies, the more time you give this one, the better.
But the gift isn’t for everyone. Here are six questions whose answers will help you decide if your situation is a fit for the authorized user strategy:
Can the authorized user be added to “good news only” tradeline?
Ratio ** less than 30% balance to limit
Payment history ** On time every time
Length ** Longer the better
Who can be your authorized user?
Check the CC policies
No age limit
Anyone you decide
No credit check
What are the rights and responsibilities of an authorized user?
Not responsible for debt or payments
Can charge up to account limit without further approval
Adhere to relevant portions of the credit card agreement
What are account holder’s duties, rights, responsibilities, and exposure?
Maintain an unblemished tradeline for both ratios and payments
Control access to credit
Remove authorized user before negative impact event reports
What are the authorized user’s qualifications and duties?
Fully trustworthy with access to your credit card limit
Appreciates the privilege
Maintains your security and trust
Gets off the account ASAP!!
How to add an authorized user safely?
Don’t give them a card
Don’t give them the account number
Notify them when they have been added or removed
Pro-actively adding authorized user to your credit card accounts can be an effective MoneySmartLife strategy and give a good credit legacy to your offspring. It is part of monitoring/mentoring your children’s credit. Having good long-term authorized user tradelines on the credit reports means they are more likely to be approved without the need for a co-signer when they apply for credit.
Good credit grandparents can leave good credit legacies safely to multiple generations since there are rarely limits on the number of authorized users. Just make sure that each of the six questions has the right answer.