11 Dec Improve your credit score, instantly!

How to improve your credit score instantly.

Dear Alba Translations, CPA,
Thanks for offering your advice on fixing my credit score. I have a 626 credit score and am looking to improve my credit profile in preparation for purchasing my first home. I read that a relative or friend can add me to their highest-limit credit card and his history and high limit is added to my account. How will that benefit me? How long will it take? Will it hurt me in any way? And how will that possibly hurt his credit? – Long time client.

Dear long time client,
You’ve clearly identified one of the two best vehicles, authorized user cards — the other being secured credit cards — to improve your credit score. Both can be particularly useful for consumers who, due to a low or no credit score, find themselves unable to obtain the credit needed to establish or re-establish good scores any other way.

I’ll address your specific question on authorized user cards and briefly touch upon how obtaining and properly managing a secured card can also help improve your credit score.

Adding someone to a card account as an authorized user is a process whereby the primary cardholder, one who either individually or jointly bears responsibility for all charges on the card, allows another person access to the card free of any such responsibility. While typically being a spouse, child or other relative, an authorized user can be anyone chosen by a primary cardholder without restriction by the card company. In recent years, becoming an authorized user on an account to take advantage of the score-enhancing possibilities has come to be known as ‘piggybacking’.

1. How will piggybacking benefit me?
Piggybacking enables the entire history of someone else’s credit card account to be placed on your credit report and, most importantly to improve your credit score, includes this information in your credit scores. Any positive impact to your scores from an authorized user account is most likely to be the result of the lower combined utilization percentage (card balances/limits percentage, making up almost 30 percent of the score) that results when a piggybacked card having low utilization is combined with the higher percentages of your own cards.

2. How long will the benefits of piggybacking take?
Another piggybacking advantage is the speed with which an authorized user account is added to your credit report after the request is made to the card company — typically within 30 days. In fact, the scoring impact can be so quick that someone who one day has no credit score can achieve a high credit score the next, simply due to an authorized user account appearing on the credit report.

3. Will piggybacking hurt me in any way?
It can. Looking at the flip side of some piggybacking advantages, you’ll want to make sure the account on which you’re an authorized user remains in good standing. Specifically, the payment history of the account must continue to be flawless and the credit utilization percentage consistently low if the account is to continue helping your score. According to FICO, a late payment by the primary account holder can drop a high score by as much as 100 points, while a single maxed-out card can lower it by up to 45 points. To avoid either scenario, you’ll want to protect your score by checking your credit reports at all three national credit bureaus — Experian, Equifax and TransUnion — periodically to make sure the authorized user card is doing its job.

4. Can piggybacking on my relative’s card hurt his credit?
While, as noted, mismanagement of the piggybacked card could negatively impact your credit score, there will be no risk to your brother’s credit score from this arrangement, since you won’t be using the card and nothing on your credit report will ever have any effect on his 800+ score.

5. Secured Credit Cards

You can also obtain a secured credit card from major card issuers such as Mastercard or Amex. It’s a credit card that offers you an opportunity to build or rebuild your credit with responsible use. A secured credit card requires a refundable security deposit, which is held as collateral for the account. This is normally used as a stepping stone to creating rapport with the credit card companies before a credit line is issued. This process can take months and sometimes years and is much slower than the Authorized User option.

Foreword: Helping the people you care about.

Today I want to expand on the idea of using your credit accounts to improve the financial position of the people you care about. Adding an AU to your account is not unusual. The credit card companies actually encourage the activity. You may be familiar with the emails they send you recommending you add AUs.

Friends and Family
Starting out is hard for young people as they cross the threshold of adulthood. One moment they have no legal authority to sign loans or make important financial decisions and the next day, on their 18thbirthday, they are thrown into the mosh pit of life where they are expected to know all the rules and are responsible for every decision they make financially. Good thing the education system doesn’t prepare them for the fateful day. That might hurt bank profits and we all know how terrible it is for Wall Street when people actually understand a thing or two about finances.

Life starts without a credit score. Normally I would say credit scores are worthless and not being able to borrow money is more blessing than curse. Unfortunately, credit scores are used to determine auto insurance rates and even can prevent you from finding a place to rent. Your credit score affects your finances even if you never borrowed a plug nickel in your life. A ‘good’ credit score is valuable as it can reduce your expenses without effort, i.e. lower auto insurance premiums.

Adding your son or daughter as an authorized user to your credit card can remedy the situation. Have three kids in college? Add them to several of your credit cards. You decide if they actually get the card to use. You can also limit how much they spend or even have the credit card company never send a card in their name.

An important point to remember is to only add the kiddos on accounts you actually use (so it gets reported to the credit bureaus). One small purchase will cause most cards to report to the bureaus. For the kids to benefit, keep the balance low. Once the balance reaches above 15% or so of the credit limit the benefits are diminished. The best way to do this is to put a low level of spend on the card/s you have the kids on and pay it in full each month.

The large amount of unused credit your children now have from being your AU increases their credit score. This in turn lowers their auto and renter’s insurance rates. If they ever need a loan (auto, home, education) they will qualify for lower rates without the need of you co-signing the loan (hopefully).
For the same reasons you want to add the wife/husband or significant other. They do NOT have to use the card or even have access to it! Just by being on the list benefits them.