Establishing new, positive lines of credit is the most effective way for consumers to begin rebuilding their credit after filing for bankruptcy protection. And while nothing is a silver bullet, counterbalancing a poor credit report with positive entries is certainly step one, possibly as an authorized user on a loved one’s credit card.
The problem, however, is that it can be difficult for a post-bankrupt consumer to be approved for new accounts. Thankfully you can add positive information to your credit reports without having actually having to apply for new credit.
The authorized user strategy
The authorized user strategy is relatively simple to understand. Simply ask a friend or family member to add your name to one of their existing credit card accounts as an authorized user. The credit card company issues a new card for the authorized user (you), and mails it to the primary account holder (your family member).
Within a couple of months the credit card account will be added to your credit reports. This accomplishes the goal of getting something good added to an otherwise bad credit report. Plus, you can actually use the credit card as if you had opened the account yourself to begin with.
Downside of adding authorized user
There is not much downside risk to being added as an authorized user to a loved one’s existing credit card account. You are not legally liable for the account holder’s debt, so there’s no chance you would ever be compelled to make the payments.
There is a risk of credit damage but only if the primary cardholder misses payments or runs up a large balance relative to the credit limit. Even then, you would be able to have your name removed from the account and to have the account deleted from your credit reports, simply by asking.
There is, of course, potential downside for the primary account holder when he adds you as an authorized user to his credit card account. If you run up a large balance, the primary cardholder is on the hook for the debt. If this happens the primary cardholder could find himself incurring large amounts of credit card interest and even default on the account.
Beware of ‘piggybacking’ with strangers
In years past it was fairly easy to find companies that would facilitate the “rental” of an authorized user account simply for the purpose of gaming the credit scoring system. In other words, a consumer could pay to be added as an authorized user to a credit card account belonging to a complete stranger.
While paying to benefit from a stranger’s good credit history might sound like an intriguing idea on the surface, it is actually a bad idea for a variety of reasons.
You can make a pretty good argument that illicit piggybacking followed by taking out new loans as a result of your newly improved credit scores is bank fraud. Newer versions of credit scoring models are designed to minimize or eliminate the positive impact of illegitimate authorized user accounts.
The right way
Millions of consumers establish or rebuild their credit using the authorized user strategy, and have done so for decades. There’s nothing wrong with having a parent or a spouse add you to one of their existing credit cards.
Credit scoring systems approve of the strategy and lenders have no problems with the approach. Just be certain to have your name added to an account that has always been paid on time, has a low balance relative to the credit limit, and is an older account.