Will Your Score Decrease?
Fair Isaac, the company that makes FICO credit scores, announced a major change
in June. Starting this fall, authorized user credit card accounts will no longer be factored into the newest version of FICO credit scores offered to lenders. This update will likely cause major score changes for about 60 million consumers. Let's break it down:
What are authorized user accounts?
Credit card issuers allow customers to add other people to an account as "authorized users" without running a credit check on this additional user. The authorized user can then use the credit card and the account record will appear on his or her credit report. The authorized user has no liability for the payments. About 30% of people have authorized user accounts on their credit reports.
How do authorized user accounts impact my FICO scores now?
If you are added as an authorized user on a credit card account that has a low balance, a long history and no negative marks (like late payments) then your score is benefiting from the account. Right now the FICO score doesn't distinguish between authorized user accounts and accounts where you are listed as the primary cardholder.
Why is FICO making this change?
FICO scores currently count authorized user accounts the same way as credit card accounts where you are the primary user. This "loophole" allowed consumers and credit repair companies to artificially inflate credit scores by adding authorized users on an established credit card account. FICO decided to stop counting authorized user accounts in credit scores as a way to protect their business clients against this type of "piggybacking" fraud.
What will happen to my credit score?
If you have an authorized user account on your credit report, your credit score will probably decrease when the change takes effect this fall. You will lose any "points" you earned from having the extra credit limit and years of credit history from the authorized user account. Your credit score would only increase if the authorized user account was hurting your credit with late payments or a maxed out balance.
What can I do?
The first step is to check all three of your credit reports and credit scores to see if you have authorized user accounts listed on your files. If so, you may want to switch your authorized user accounts to "joint user" accounts by contacting the credit card issuer. Or you might open a few credit cards of your own that have the same, or higher, credit limits than the old authorized accounts.
What will happen next time I apply for a loan?
Be very aware of your credit scores if you are planning on taking out a loan or refinancing before the end of the year. You may be offered higher rates or even turned down for a new account if your credit scores drop because of the authorized user change.
How can I establish my credit after this change?
Being added to someone's credit card as an authorized user used to be standard practice for establishing credit history. Parents often do this to help their kids. This shortcut will no longer work after the FICO change takes place at all three credit reporting agencies. People who want to establish their credit will need to open their own student credit card, secured credit card, or subprime credit card instead.
You can read more about this FICO change online at Credit.com and on
CreditBloggers.com. If you have a question about what this announcement means to you, send us an email at tidbits@credit.com.
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"What we call 'Progress' is the exchange of one nuisance for another nuisance."
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