A Look at FICO 8 and Authorized User Credit

authorized-user-can-boost-credit-scores

When Fair Isaac Corporation (FICO) announced a few years ago they were rolling out a new credit scoring model that did not factor in authorized user accounts, an uproar broke out.

Authorized user credit had always been a way to grant individuals access to credit accounts without assuming payment liability or having to qualify for their own credit accounts.

It is estimated that 50 million consumers are authorized users on someone else’s credit card. Authorized user credit is common among spouses, parents and children.

FICO had wanted to eliminate the authorized user credit because of the widespread use of “renting out” good credit for a limited term and getting paid for it. The authorized user would not actually get use of the credit account, however, they would get the benefits of the primary account holder’s good credit history. FICO considers this practice as misrepresenting a consumer’s credit risk to lenders.

However, FICO 08 could not eliminate authorized user credit from impacting the authorized user’s credit scores. Lenders complained that using FICO 08 without it factoring in authorized user credit would inhibit compliance with Federal Reserve Regulation B, which requires lenders assessing a married person’s credit risk to consider the credit history of accounts shared by the spouses.

The Equal Credit Opportunity Act requires lenders to consider a spouse’s credit history when determining the credit risk of a borrower. If authorized user credit were abolished it would have prohibited lenders from complying with the Equal Credit Opportunity Act.

Authorized User Credit remains a part of FICO 8

It only made sense for FICO 8 to continue authorized user credit or “piggyback credit” because every generation of the FICO score formula has included authorized user credit card accounts when calculating a person’s score. FICO 8 score continues that policy.

Authorized user credit continues to benefit consumers with shared management of a credit card account. It also helps lenders by providing scores that are based on a full picture of the consumer’s credit history. Although to protect lenders and honest consumers, FICO 8 substantially cuts any benefit of “tradeline renting.”

But there are some changes in FICO 8.

What Changed in FICO 8 Credit Score

Using Most of Your Available Credit.
FICO 8 penalizes consumers who use most of their available credit. If your credit report shows credit cards with high balances that are close to the account’s limit, your score will lose points. Always keep your balances to 30 percent or less of your available credit limit. For even higher credit scores, FICO says keep your balances to 7 percent of your available credit scores.

One-time Late Payment.
One 30-day late payment can take as much as 80 to 110 points. FICO 8 is more forgiving for an isolated late payment if your other accounts are in good standing. But if you have numerous late payments, FICO 8 will penalize your score more heavily.

Small-balance collections accounts.
FICO 8 score ignores small-dollar “nuisance” collection accounts in which the original balance was less than $100.

Using Authorized User Credit to Improve Scores

When you are added as an authorized user and that person who added you has good credit, your credit score may get a boost. If you’re a student or stay-at-home mom, with no income and credit history, being an authorized user will usually help establish your credit history and could improve your credit score, provided the primary card holder has good credit. The payment history for the card will be reported on your credit report.

But being an authorized user carries some risk. Authorized users could see their credit score plummet if the primary cardholder defaults on that account. Primary cardholders are liable for any debt incurred by the authorized user, and high balances could damage their credit scores.



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