Authorized User Accounts.....Good or Bad?
For years people have been adding their spouse or child as an authorized user to an existing, good standing account (usually credit cards) to help them establish credit. While this practice can help, it should only be used in the short term.
Mortgage guidelines now require borrowers be removed as authorized users prior to approving the loan in most cases. The reason this came about is since an authorized user isn't usually responsible for making the payments on the account, their credit report and credit scores are not an accurate reflection of their credit profile. As you can imagine, removal of these accounts may negatively impact the borrower's credit score and could lead to an issue with loan approval. The sooner in the process the better when determining how best to handle authorized user accounts.
The history behind authorized user accounts ~
"Piggybacking" someone else's credit has been frowned upon by lenders in recent years as many people have taken advantage of the situation. There are actually company's out there who will pay individuals to allow them to add an authorized user to their good standing accounts in order to help out someone with not so good credit. Costing anywhere from $500 to $5000 to do this, it has given authorized user accounts a bad name.
Adding a child or a spouse as an authorized user is a first step to helping them establish credit, but is not a long term solution. Once the authorized user accounts have helped them obtain credit scores, it is time for that person to start establishing credit on their own. There's a few ways to do this: secured credit cards or lines of credit, gas cards or department store credit cards. As long as payments are made on time and balances are kept low (25% of the limit or less) their credit will begin to build! Establishing 2-3 cards is a good start and once credit is established, it would be time for the authorized user to be removed from any authorized user accounts. The primary account holder will need to request the removal of the authorized user.
Planning ahead and taking the right steps will ensure a borrower is ready to make a big purchase, such as buying a new home, and will avoid having to jump through any hurdles in the middle of the loan process. With so many first time home buyers in our market, it important to educate them up front on this important change in the mortgage lending guidelines.
Thanks to Kelly Zitlow at Cherry Creek Mortgage www.kellyzitlow.com. for the use of this content.
Brent Hammonds
Associate Broker
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