By Zina Kumok, Financial Health Counselor, Credit Counselor
Reviewed by Lauren Bringle, AFC®
As a parent, one of the most important things you can do to help your child become successful financially, is get them started on the path to a healthy credit history.
Starting your adult life without a credit score can create unnecessary obstacles. Much like trying to find your first job without any real work experience, most forms of credit require you to have an established credit history to be approved.
If you can help your child build credit before they leave the house, you'll be giving them a valuable head start.
That's where credit piggybacking comes in. Read on to learn how you can use piggybacking credit to help your child or family member establish credit or see our related article about how to establish credit when you're 18.
Building a credit score from scratch can be a Catch-22. You need to have good credit or some credit history to qualify for a loan or credit card account, but you can't build a credit history without getting a loan or credit card first. Some people will begin with a credit builder loan just so they can start to learn how to build credit.
Wondering, “do authorized users build credit on credit accounts?” Yes. In fact, one of the easiest ways to help your kids establish a credit history is to let them be an authorized user on one of your credit cards, also known as "piggybacking" on your available credit.
Piggybacking credit works like this: You have a good credit score and a credit card that you use regularly, always paid off in full. Using this credit card helps you maintain a good credit score. You want to help your child set up his or her own credit history, so you make them an authorized user on your credit card account.
Credit card companies generally let the primary account holder add a legitimate authorized user for free or a small fee. The payment history on that credit line starts showing up on the authorized user’s credit report.
Everything about the credit account is now tied to the authorized user's credit history, including credit utilization and if you make the payments on time. This also means the authorized user's credit score will be damaged if the account ever defaults or goes to collections.
If you use the card responsibly, the authorized user will probably see an increase in his or her credit score. This can be beneficial when they graduate and need to rent an apartment, put utilities in their own name or refinance their student loans. The best part of this strategy is that you don't actually have to give the authorized user access to the account.
For example, if you add your teen-ager as an authorized user on your American Express credit card, you don't actually have to give them a copy of the card with their name on it. Without a copy of the physical credit card or the account information, there is no danger of them running up a balance on the card, negatively affecting their credit and yours.
Before trying out the strategy, call your credit card provider and ask if they report card activity to the authorized user's credit report. Not every card will submit activity to the credit bureaus on the authorized user's behalf. If the card issuer doesn’t report your card usage on behalf of the authorized user, your child wouldn't see any benefit to being an authorized user on your card.
You can keep the authorized user on your account for as little or as long as you like. If you ever decide to close the account, be aware that you'll be affecting the authorized user’s credit, too. The average age of your credit accounts is a factor in determining your credit score, so by closing the account you'll decrease their average credit length and potentially harm their credit score in the process.
If your child graduates college without student loans, they won't have any credit to start their credit report. That could make it much more difficult to get an apartment without a cosigner. They also won’t be able to open a rewards credit card or even sign up for internet without paying a deposit first.
A good credit score and positive credit history helps lenders and retailers know if a consumer is financially trustworthy. By letting your child piggyback on your credit, you'll be giving them an advantage in life - without having to lend them any money or cosign on a risky loan.
The only danger in allowing someone to be a legitimate authorized user on your credit card is if they end up using the card to make purchases you can't afford. No matter who made the purchases, the original card owner is always responsible for paying the bill. The card issuer doesn't care if your 16-year-old son used his authorized user status to buy a gaming system - they just care that you pay for it. So make sure the account is kept in good standing by making payments on time.
Given the benefits credit card piggybacking can have on an individual's credit, several companies offer it as a paid service. These types of companies add people looking to improve their credit onto established accounts of unrelated, willing cardholders with good credit. That is intended to improve their scores the same way being added to a family member's account does. This is otherwise known as for-profit piggybacking.
The process may not be that simple, though. FICO — who produces the most widely used credit score in the U.S. — claims that they’ve developed methods to block these services from actually impacting scoring algorithms.
"If we're talking about piggybacking in terms of the buying and selling of tradelines to improve one's score, FICO doesn't recommend that or recognize it in the newest FICO scoring model, FICO 8," according to Barry Paperno, former consumer operations manager for myFICO.com.
Paperno specifies that FICO’s scoring algorithm looks “for certain patterns that are typical for illegitimate authorized user accounts.” FICO does still claim to accept credit history when an authorized user is added legitimately onto the account of a family member or friend.
Whether FICO's detection system is perfect at filtering out paid piggybackers or not is hard to tell. But if you're thinking about using a paid service, you should be prepared to accept that it has no impact.
The services are expensive. These types of services vary, but depending on which one you choose, you could pay up to $4,000.
You give away personal information - While becoming an authorized user, the company gains access to your name, date of birth, address, and Social Security information.
It’s not a long-term solution - Since you’re only an authorized user for a short period of time, your credit score has the potential to drop again once you are removed from the account.
You won’t develop your own habits - Being an authorized user doesn’t teach you how to build responsible habits. These habits are vital to build and maintain your own credit score in the future.
Not all lenders approve - Lenders want to be reassured that you can manage your own credit accounts. Some will be less likely to approve a loan request if they see you’re using someone else to help improve your credit.
If your child needs to build his or her credit report and you don’t feel comfortable making them an authorized user, have them sign up for a secured credit card when they turn 18. In order to do this, they’ll have to have a reliable source of income outside of any money you give them.
A secured credit card requires a deposit to act as collateral. They’re designed to help people with no credit or poor credit learn how to handle credit cards responsibly, with little risk for the lender. Don’t get a secured card confused with prepaid debit cards, which function similarly but won’t contribute to building credit.
The deposit will usually be the amount of the credit limit. If the credit limit is $200 on a secured card, you’ll have to give the credit card issuer $200. Then, you use the card just as you would any other credit card. After a few months of on-time payments, the card issuer may automatically upgrade you to a traditional credit card.
Your child doesn’t need a co-signer or other user to sign up for a secured credit card. They can apply for a credit card on their own. Self now offers a secured credit card that uses your Credit Builder Account savings progress as the security deposit.
Zina Kumok is a Financial Health Counselor and Credit Counselor, certified by the National Association of Certified Credit Counselors, who writes extensively about personal finance. See Zina on Linkedin and Twitter.