Real Estate Insights

A major change to the FICO® credit score formula was announced by Fair Isaac Corporation earlier this week. FICO scores will no longer factor authorized user accounts into their credit scoring formulas.

Consumers who are listed as authorized users on credit card accounts will likely see a significant change in their credit scores when this modification takes place later this summer. For most consumers, this change will have a negative impact on their credit scores. Only consumers who are listed as an authorized user on negative accounts or accounts that have balances that are close to the credit limit will possibly see an increase in their credit scores.

Adding a family member or friend as an authorized user on an existing credit card account has long been used as a way to establish credit. Many parents added their children as authorized users in order to help them build their credit history. However, credit repair organizations have also started using this system as a way to fraudulently sell authorized user account access to consumers with credit problems. This credit repair loophole was part of the motivation for the FICO score change.

Q&A

What does this mean for consumers?
Consumers who are benefiting from authorized user accounts on their credit reports will see their credit score decrease when this change takes effect. They will essentially be “losing credit” for these accounts. Consumers with negative authorized user accounts (with late payments or high balances) could possibly see an increase in their score.

What is an authorized user account?
Credit card issuers will allow customers to add other people to the account as an “authorized user” without running a credit check. The authorized user can then use the credit card and will have the account record appear on their credit report.  The authorized user has no liability for the payments.

How many people will be impacted?
Fair Isaac has reported that 30% of the population has an authorized user account listed on their credit reports.  That means that between 60 and 75 million consumers will be impacted by this change.

Why did FICO make this change?
Credit repair organizations were abusing the authorized user system. Some companies were illegally selling access to authorized user accounts as a way to help people with credit problems improve their scores. These services would retail for thousands of dollars in some cases.

How will people establish their credit without authorized user accounts?
While being added as an authorized user used to be a great way to build your credit history, it wasn’t the only way. Consumers with no credit can still apply for their own retail credit card, gas credit card, secured credit card or subprime credit card as a way to build their credit. This method of establishing credit is a bit more difficult and expensive than being added as an authorized user.

What does this mean for the credit card industry?
Credit card issuers will have to adapt to this change slightly. Consumers may be less motivated to have authorized users on accounts. There will probably be an increase in first time borrowers looking for subprime or secured credit cards as a way to build their credit history.