You may have heard about different ways to build credit as a young adult, including becoming an authorized user on a credit card, taking out a student loan, or applying for a credit card yourself. Do these options work? If you’re hesitant to believe, I’m here to tell you just how well one of them worked for me, and helped me get ready for the credit world on my own.
How Being an Authorized User Worked for Me
I grew up with frugal parents – we saved money, spent as little as possible, and paid off everything as soon as possible. I was always taught to save more than I spent, and to use the money I had wisely. When I turned 16 and started driving, my parents decided it was time for me to get used to credit cards – little did they know the positive impact it would have on my credit history.
They’ve been longtime American Express card holders, and although American Express is a charge card – a card where you must pay off the entire balance each month (instead of having the option to pay a minimum amount each month) and pay an annual fee – it’s essentially no different than a credit card. My parents listed me as an authorized user under my dad’s account, and I was given my own charge card with my name on it. Because AmEx cards have a spending limit instead of a credit limit, my limit on how much I could spend was determined by my parents’ highest paid-in-full balance over the last six months times three, which was a very large amount.
So, my parents treated my AmEx card like a traditional credit card. I was given a “credit limit” of around $150 a month and could use the card for everyday things such as getting gas and buying the groceries that I needed. The card was also for emergencies, which luckily I didn’t need to use often.
I was listed as an authorized user for roughly six years. The card lasted me all through high school and college, and because my parents were always diligent on paying the bill each month, I had all that positive payment history on my credit reports. When it was time for me to apply for my own credit card as an adult after college, I approached my bank, and I qualified for all three credit cards they had to offer. My FICO score was in the low 700s, and that was purely from being an authorized user for so long.
Now, a year after taking out my first credit card, I’ve learned the importance of paying off your bills in full each month, and just how helpful it was to be an authorized user on my parents AmEx account. I started out in the credit world on the right foot, and now I’m focused on building my credit mix to maintain my excellent credit score.
What Does it Mean to be an Authorized User?
An authorized user is someone who's added to someone else’s credit card account. Also known as “piggybacking” onto the account, being an authorized user is a great way to establish credit history. Depending on the credit card issuer, you may be able to get your own card with your name on it and use it like any other credit card. But the primary account holder must have good credit, be on top of their monthly payments, and make sure the credit card issuer reports the activity to the credit bureaus – if the authorized user wants to see their credit score improve.
Even though you aren’t responsible for them, it’s extremely important that the primary account holder is consistent and keeps up with the monthly payments. What they do affects your credit score, too. So, if the primary holder misses a payment or two, your credit score will take a hit. Make sure you sit down and discuss being an authorized user with the primary account holder, and bring up potential risks or concerns you have.
Which Credit Card is Best for You?
There’s no good answer as to which credit card is best for you. Each person has different needs and budgets, and no two credit card issuers are the same. But, if you’re looking for a place to start, NerdWallet compiled a list of credit card issuers that report authorized users to the credit bureaus as of November 2017:
- American Express
- Bank of America
- Capital One
- Wells Fargo
So, generally speaking, major credit card issuers report authorized user activity to the credit bureaus. If you’re considering becoming or making your child an authorized user with a card issued by a bank or credit union, make sure you ask about reporting user activity. Many major banks will report activity, but some may not. Because credit unions are smaller banks, they may not have the ability to report authorized user activity.
Preparing Your Credit for a Car Loan
If being an authorized user isn’t in the cards right now and you’re looking to get your credit ready for a car loan, you may not need to wait. There are many special finance lenders that know how to handle unique credit situations in order to help you get the financing you need.
I know that sounds great, but where do you start your search? With us here at Auto Credit Express! We connect consumers dealing with bad credit or no credit to local special finance dealerships. See what we can do for you by filling out our free car loan request form today.