What can you reap from using the authorized user strategy? In this episode, Merrill Chandler and Co-Host Brad Burnett exchange insights as they answer questions related to this strategy. While the unholy trinity of credit reporting surfaces in the topic, they discuss about the organic evolution of credit from farm tabs to its formal industrial extension up until what it is today. They also note how the FICO system comes into play and take a deep dive into the authorized user strategy for newbies and how it can possibly blow up your profile. Learn more as they discuss about how you can ward off creditors from making more money from you.
Watch the episode here:
Listen to the podcast here:
Dissecting The Authorized User Strategy
In this episode, I was going through some archives of our Facebook Live presentations where Brad and I are doing more questions than answers. We are taking questions from our insider group and our Facebook Live participants. Some of the answers to these questions, I haven’t even covered in the show. I thought it would be perfect for you to be able to read this. I believe even one of them, I’m up on a whiteboard outlining strategies. You’re going to enjoy it. It’s worth it to me to give it to you. I hope it’s worth it to you to make sure that you add this to your knowledge base as we continue to make you F-able. We’re going to drop right into the question and answer on this episode.
Great things are happening in CreditSense land. We’ve had some wonderful feedback about some of our topics, which we want to re-address. When it comes to profile and funding optimization, I’m a line drawer, drawing lines in the sand. I’m trying to protect our clients, our audience, the 80th percentile, the bell-shaped curve, 10% radical this way, 10% radical that way. What applies to 80% of us applies to 8% of us. I want to make sure that you are doing safe things if you’re taking any of our suggestions to heart and beginning to implement them. There came to us a couple of outliers, the 10th percentile that we felt was important to address. I was thinking of the authorized user one.
I was thinking that last one because the first one I’m going to check out was a question we got from McKinsey in Washington. Her question was straightforward. What is Experian?
That’s like asking what’s a credit bureau? This is a great opportunity to address it from a 1,000-foot view. These are what are called Consumer Reporting Agencies, CRA’s. A Consumer Reporting Agency falls under the Fair Credit Reporting Act. In 1971, Congress said, “There’s so much blacklisting going on.” People of color and races and even communities inside of the same cities were discriminating against each other with all these things. They came up with the Fair Credit Reporting Act that didn’t allow you to be blacklisted. What distilled out of this is Experian is one of the final three in the merging process over the last century of these individuals, companies and organizations who began reporting on originally all kinds of stuff, but is now limited to payment history. A credit reporting agency has to follow the rules of the FCRA.
In our organization, we call them credit bureaus. We want to specifically remind our clients that we’re talking about Experian, TransUnion and Equifax. Those are what I call the unholy trinity of credit reporting. If there’s a big brother out there, it’s less the NSA than it is that credit reporting. Did you realize that when you swipe your card to make a purchase, debit or credit, that magnetic code that goes in their tracks the type of purchases that are being made by you? Have you ever wondered why when you buy a watch, 4 to 10 days later, you get this perfect catalog of all these watches in your mail? You’re like, “How did they know?” Your magnetic strip carries far more than your account and debiting information. When they scan those SKU codes that every product has, they are linking those to your purchasing behaviors.
Credit reporting is extremely invasive. How many of you walked into a mall where there’s a kiosk standing there and they read your Google phone? Google is infamous for this and they are popping up saying, “Did you know there’s a 10% discount here at the Buckle?” You’re like, “I don’t shop at the Buckle, but I just walked by the Buckle.” The Buckle has these little codes and infrared transponders out there that are hitting especially Google phones. You can have the app inside of your iPhone and you’re now being tracked by these micro trackers so that they can make you aware of specials as you walked by a store. Do you remember the movie, The Minority Report, you walked by and said, “Hello, Merrill Chandler, did you know that you can go to the Caribbean for $400 less than everybody else?” Credit reporting is designed to help merchants and lenders make money. Experian is one of those final three.
A follow-up to that is I like the story, it seems pretty possible. We came in 1971 and now we have the FCRA. Where did they come from before that?
This is the organic development of a machine at its finest. For 6,000 years, agrarian communities had somebody who was a merchant like the general stores you see in the Western movies and stuff like that. The farmer would come in and say, “If you give me a sack of grain, I’ll give you two sacks of grain at the end of harvest.” That was credit. You are local to the community. You weren’t going anywhere. You were tied to the land. People get, “Can I throw some flour on there, some baking soda so I can make my hotcakes,” all of those things. The general store was the center point and you could have a bar tab, you could have a saloon, you could have tabs everywhere, but everybody counted on you being a member of that community. Credit was given that way.Necessity is the mother of invention. Click To Tweet
Interestingly enough, when you asked on credit for a bag of seed and you pay two bags back, that’s 100% interest if we want to put it in the financial terms. For 6,000 years, that’s how credit was extended and how it’s paid back. In the industrial revolution, as it began to move from an agrarian society into the industrial society, the next generation of children were all moving to the city looking for work and everybody was still in bureaus. New York is still the biggest reminder of that. There are seven bureaus inside of New York City. The fascinating thing was that all communities were broken up usually by ethnicity, different dialects and countries of origin.
You knew your own people but to go to somebody else, you’re a little more of a foreigner even if it was just four blocks over. What began to develop up in the ‘20s, the ‘30s, all the way into the ‘50s were what were called merchant associations. Originally, the butcher kept a tab, the general store kept a tab, the tailor kept a tab, everybody kept a tab, but they didn’t coordinate. “Did you get paid back by Merrill Chandler? Should I extend him? He needs this Sunday go-to-meeting outfit. Do I extend it to him on credit?” Unless they were talking over at the bar or the saloon, not a lot of communication was going on.
Necessity is the mother of invention. These merchant associations started coming together and an individual said, “I’ll keep tabs. Baker, give me the juice on Merrill Chandler. Butcher, give me the juice on Merrill Chandler. Barkeep, give me the juice on Merrill Chandler.” They started keeping ledgers of who had and who had not paid, whether they could trust or not trust to lend to you. Do you know who the very first formal industrial extension of credit was? The very first one in 1910 was the Model T Ford. Ford had the idea that if you let somebody drive the thing while they paid for it, they would probably keep paying for it. The Model T Ford was the first extension of credit as a business model as a central corporation. Singer sewing machines. Do you know those old pump machines that you use?
Most people have no idea. You can find it in museums or at my mom’s house.
It was old school. It was a paddled sewing machine. I grew up with one of those in my house. My mom was using the electric one, but it was from her parents before her. Singer also extended credit for them to be able to buy these sewing machines. These merchant associations started expanding and they started crossing international boundaries between bureaus and bureaus. Interestingly enough, Experian is a public company, TransUnion is a private company and Equifax is a public company. TransUnion still is out of Chicago, Illinois. Other things happened in the ‘20s, ‘30s, and ‘40s that also included keeping lists on people and seeing whether or not they paid their protection money and whether or not you’re doing what you’re supposed to in the framework of being a business owner in Chicago. I’ve done some research, the deeper you go, there are certain things that Capone and some of the other ingenious businessman of the day who used muscle in order to extort money out of businesses. They kept records on every single business and the bad habits of those business owners could leverage over those business owners.
That’s why as it came to be, these merchant associations grew and influence. They became non-selective about what they meant because Capone used to keep all the data on you. At some point, the Fair Credit Reporting Act said, “It’ll only be about your financial relationships and how well you pay your bills instead of keeping that your race, creed, color, religion or ethnicity.” All those things were accounted for by these original merchant associations. We’re in a position where we have the unholy trinity that derived from all of this record keeping. The Fair Credit Reporting Act has been amended twice in order to tighten up how and what it reports. A long answer to a short question, Experian is one of the three credit bureaus. The source of these credit bureaus was derived from the modernization of record-keeping to see whether or not you are worth lending to. They keep every single business as a subscriber so they can rat you out as well.
If any of that caught your interest because the story goes deeper and further into history in the past, Merrill has an incredible eBook that he created a few years ago. It goes into the money system and the credit system as well. If any of you are interested, shoot us an email at Info@CreditSense.com. We’d be happy to give you a copy.
It’s beautifully illustrated and it goes way deep both into the insider secrets to the money game and the credit game. Ask for it and we’ll send it to you.
You can even learn about the concept of the king’s ransom if you want, more in-depth than you may have ever in your life.
I went to and did graduate in History. I love the source of everything. I love knowing where the roots are.
To bring that back to credit bureaus, you kept it a little bit but keep in mind that these agencies are tracking every single thing that takes place. That’s how you’re in a position where the FICO system comes into play. FICO is not part of the credit bureaus’ reporting system. FICO is the risk analytics of all of that data. They tell the lenders how much of a risk you are if they lend you money. If you think about how this looks, you’ve got the banks and they are the customer of FICO. You’ve got the bureaus and they interact with FICO and then they’ve got you. Merrill has talked about this.
You have you, then you have the banks, the bureaus and FICO. These guys have a relationship. The only one left out in the cold is you, me, us. Where we fit at CreditSense is that connective tissue to help everybody understand. Because credit reporting is not credit scoring. They’re not the same. FICO is in charge of scoring, but the banks and bureaus, that’s credit reporting. When we say banks, the limited clothing store uses a bank to carry its paper. It’s still a bank, it’s just one of our junk cards because it’s a financed merchant. The banks and bureaus have been at this for many years.
It’s a long time. If you’re brand new to this, make sure you figure out how to play this game. Figure out how you fit in that mix so that you can seamlessly navigate what can be a confusing process.
The modern-day banks have been playing by that same lending playbook for 500 years. Bureaus have been doing it for 90 years and FICO has been doing it for 70 years. If you don’t know what you’re doing, the odds are stacked against you because they are all playing by a playbook that you have no clue what the rules are.
They’re a billion-dollar industry, every single one of them. Billions of billions are backing them so the odds are stacked against you. That’s a great explanation. Next question, moving on. Let’s go with the authorized users’ strategy for newbies. We’ve talked about authorized users the last couple of times. We’ve said how they can impact your score and how the negative is more substantial than the positive contribution. We got a bunch of emails before.
The blowback came from clients who said, “You told me to do this.”If you don't know what you're doing, the odds are stacked against you because you have no clue what the rules are. Click To Tweet
Scott out of Ohio says, “Tell me about the authorize user strategy for newbies.” That strategy is where there is a practical application and a very narrow, positive value of having an authorized user.
I did get castigated by a couple of clients. I don’t know about Scott, I got it from one of our credit advisor saying, “Merrill, you said on the thing, ‘Under no circumstances.’” I didn’t say under no circumstances. I said it’s just bad juju. One of our clients saw it because we post these in our client vaults and everything. He goes, “It’s on my optimization plan to become an authorized user.” There are two, maybe three very narrowly defined times that we want to be authorized users. There are opportunities that we call brand new credits. Many of our real estate investors and clients have us start building a perfect profile for their children. They are brand new eighteen-year-old. A few years ago, a law was passed because lenders started flooding colleges with credit applications. Students were getting into credit card debt to the tune of tens of thousands of dollars before they were twenty years old. They had been trained on how to use credit but they didn’t how the game is played.
Congress came back out and busted that whole thing. Do you realize you have to have parental or a guardianship approval to acquire any cash cards? The cash card is not a merchant card. It treats like cash. You use it anywhere and it’s like paying with cash, not to be confused with a debit cash card. Unless you have an authorization, you have to be 21 years old to formally go get your own unsecured credit cards. You can get a secured credit card at eighteen. There are strategies in which we can start building borrower profiles for young people.
More interestingly, we can use the authorized user under certain circumstances. When you close that down like we ultimately will, the oldest card on your profile is now closed. We have to evaluate what your long-term goals are and the piece in which you want to grow your profile. Brand new individuals can adopt or can become an authorized user on a parent or other adults credit card holder to establish a baseline score to get other credit instruments. We’ve run into children of real estate investors where the parents want to put the child on a mortgage, but they have to have a substantial score. They will accept an authorized user if there are other trade lines there. They will add to the age and the score criteria because mortgages are score sensitive. It is not as much profile sensitive because for obvious reasons it’s secured by the home.
That’s one instance. Young people, 18 to 21-year-olds who are beginning to build a profile. There may be an opportunity to pick up, but do not get addicted to the scores that come with that because it’s not based on anything that a banker or a lender is going to use to you. If you’re going to be put on a car as a secondary or a co-borrower, if you’re going to be put onto a house as a secondary or a co-borrower, the operation or strategy may help. It cannot be your only trade lines, but it will benefit those other more extensive purchases. Another opportunity is post-bankruptcy. It depends on your end-game. You don’t just go do it because it’ll jump your score 20 to 30 points.
An authorized user can’t get you approved for anything unless you have a plan to get the next tier and value contribution account so you can start building a profile. You can do it at post-bankruptcy. There have been a couple of clients who were post-divorced and their credit got thrashed. We saw an opportunity to use an authorized user temporarily as a bridge towards getting their own security accounts or put on another vehicle or another mortgage to start building a file. Notice that we’re using this authorized user to establish a beachhead on installment loans. They don’t do much for us overall unless it’s secured. It doesn’t do a lot for us over the unsecured building of a revolving account portfolio. It does help when you’re establishing installment loans as a co-borrower or having a co-signer on a car or something like that.
The idea to just put a ball on that is you want to use this strategy for a very short period of time. It’s not something that you should not become addicted to the score. Don’t think you need to keep this on forever? A simple solution if you plan for it would be to use the authorized user, get the approval that you’re looking to get in short order. The timing would vary.
It’s certainly not over a year. It could be as little as six months. This is just an interim bridge.
The plan is I will remove this authorize user at some point. It’s not just to keep it on my profile until the end of time. Especially those of you who have any aspirations of truly becoming a person who masters leveraging your profile, especially for business. I know this doesn’t go out to all of our specific clients for business and investment purposes. If you have that idea in your head at all that maybe someday I want to get into investments, having an authorized user at that time becomes almost a nail on the coffin.
You’re not a sophisticated borrower, which is a waste of time. Leveraging other people’s money to build real estate empires, whether you play in stock markets or you’re buying and selling commodities online. Leverage is renting your money for cheap and being able to make more money with the money that you borrowed. That is a sophisticated borrower profile and nowhere in there does an authorized user card thrive and prosper. As you said, it’s a nail on the coffin.
There is a time and a place. It’s a very narrow window and rare with planned obsolescence. For example, your iPhone. I don’t know if you experienced this phenomenon. It has nothing to do with credit, but it has everything to do with my belief that there is a system laid against me. Planned obsolescence is this concept of every time a new iPhone comes out, I get an update and something starts going wrong with my iPhone that was working perfectly up until then. We just got the iPhone X, now your iPhone would hold a charge.
All of a sudden, my battery keeps draining. I knew there’s a real problem when I call the local Apple store and they say, “If you’re having problems with your battery, press one.”
Do you need to do that with your authorized user? I think that was my point.
Planned obsolescence is a temporary, usually very quick, six months, never more than a year. It’s to take a five-year car, create an impression usually for installment level co-borrower. You’re not going to go get a mortgage on your own with one or two authorized user accounts. It’s not going to happen. It’s to allow you to see that you are a part of this other person’s life, especially if you’re an authorized user on their card and now putting you on a car or a mortgage, then it looks like it’s a family affair. They have allowances for that. If you go out and randomly get business lines of credit, it’s never going to happen.
Could you get a Discover card? Yes, but I wouldn’t necessarily recommend it. Could you maybe even get a Chase card? Yes, but there are going to be other factors that come in when you submit your application. Could it help with that little thing? Yes. You’re not going to get a $10,000 limit in most cases, but it can help you get started, get off the ground.
What was that client who put an authorized user on there and they shut down the client because of the authorized user? It’s not even because of him.
We might have talked about that. It was a Facebook Live because we were talking about balances and they ran their balance up real fast.
It was the authorized user who ran up the balance. They shut down the card and he’s like, “I have a great store,” but the authorized user borrower profile was a trash score. They measure everything including who you give a card to. The authorized user can blow your profile or at least your chances of building a good relationship with the lender.
Keep in mind, in that particular instance, it was a brand-new card and an authorized user who had a nuclear explosion in their borrower profile with that same bank. That same bank had charged off thousands of dollars on the authorized user previous to be added to that account. It wasn’t long before that name popped up in the system. It’s not every case, but in a situation like that, an authorized user can actually hurt you. If any other questions come up, shoot us an email at Info@CreditSense.com. We’re happy to answer questions. The last question is about buying a new car. Jackie in Florida says, “Is there anything I have to do specifically for buying a new car?” She knows a little bit about what we do because she said, “Do auto dealers shop you?”
There are two things here to protect yourself from. First of all, auto dealers will shop you. We’d go to our clients and we make them fundable for an automobile. There are ways we can make you look spectacular for a new installment or a security installment, which is what an auto loan. We’re going to send you to one of your current lenders and get a pre-approval letter. You can get approved for two or three different types of automobiles if you’ve done your research. You go get approved and you’ve already got your interest rate, you’ve already got your approval because they know what your score is. They pull at your auto scores and your data. When you don’t know what you’re doing and when you are an unsophisticated borrower, you go to the auto dealer and you say, “Pull my credit and then see who will finance me.” We’ve seen as few as three, we’ve never seen less than three. We’ve seen as many as fourteen lenders pull credit on the same individual. I know what you’re coming back at me with and I’m just finding something to land on because I’m going to pull the rug out underneath this one.
The Congress came out and said, for high-ticket items, usually mortgages and automobiles, but it’d be Winnebagos or other types of things, whether you’re shopping for an automobile, over the course of 30 days, they will count all of those inquiries as one inquiry against your score. Everything’s awesome. I can just hit my borrower profile because they only count as one. It counts once against your score. It counts fourteen times against underwriting because you’re an unsophisticated borrower who’s chasing money and those don’t go away for 24 months. It counts against underwriting for 24 months. It only counts against your score for twelve. If they’re telling you a story, email us. There is 2 to 3 times more information that you need to know than what they are telling you. Mortgages are the same way, getting shocked is one of the worst things you can possibly do. There’s an ancillary thing to this.
If you’re going to get shocked, there’s what’s called the spread. Auto dealers are notorious for this. This is vital that you know. There’s what I call the credit score pyramid. Let’s call this 850. We’re going to call this 350 because generally, their score goes from 250 to 900. This is what’s called the range between scores. This is the height of your score. We want the highest possible scores. The reason why it’s a pyramid is that sometimes you can have 20, 30, up to 50 points difference between your highest and your lowest score.
The range between the highest and the lowest score. He’s talking about the range that is reported through the software scoring from the bureaus. Let’s say the TransUnion is 680, your Equifax is 720 and your Experian is 630. The range from the lowest to the highest 720, that is your range.
This would be a 90-point range. Auto dealers call it the spread. We call it the range because it’s a range of scores. I’m going to show you how they make a crapload of money off of you and you don’t even know. Here’s the fact. We’ve had this instance come up from one of our clients. He goes and buys a Jeep. He goes and shops it to five lenders. Jeep is a Chrysler company. He doesn’t know what he’s doing. He goes and gets it to shop up to five different lenders. His highest score, the three major scores are 680 to 670 range, but he had one of his scores that was 630. This makes me so mad and I want you to be prepared for it.
If you’re going shopping for a vehicle, don’t let them shop you. He’s thinking, “My auto scores are in here.” Under Experian has an auto score of three, that’s not a 5, 4, 2 but it was 630. They came back and said, “The only approval we got was from a lender at 630. You are a tier-five approval.” As we suss this out, because we’ve helped him figure this out, the actual outfit that sent him the letters and all those things was Chrysler Corp, which his score was 670. Most people don’t know what to even look for. He looked for the inquiry that isn’t the Experian which is 630.
Which 503 is only an Experian version of FICO.
It’s typically lower than the other. That’s a huge red flag. Chrysler Corporation pulls Equifax. Equifax was 670 three-tiers higher. It wasn’t tier-one, 720 is tier-one for auto. He wasn’t going to have less than perfect paper. They quoted him this, but because Chrysler happens to be carrying the Jeep paper, they have kickbacks that come back to the dealer. They charge this amount, which was $600 payment when this payment is a $555, $556 payment. That’s $45 less per month because of this score and this score, but Chrysler’s the one carrying his loan. He makes his payment to Chrysler, not to the lender that quoted him. It’s living on the spread, they tell you because when you shop it, you don’t know what you’ve gotten approved for.
When you go to a credit union or community bank, your tier-one or tier-two bank where you’ll be banking and you get approved, you know what you got approved for. Here, only they know what got approved for, but since we know the game, we’re helping you find out that this lender is not who he is making his payments to. They’re making it to Chrysler. One of the inquiries was Chrysler and that was a 670. We’re coaching them on how to go back to the dealer and accuse them of gently first and then intentional malfeasance later because he couldn’t show their own paper trail about how he should have a round of $555 payment instead of a $600 payment. That’s them living on the spread. I guarantee you, we only fear going car shopping because it’s bad. On the back end, if you don’t know the game, you’re just going to get screwed even further. That’s living on the spread.
Just to clarify the spread, it is the $600 payment to this $455, that $45 was the spread.
That’s going to that corner in a kickback.
That’s only the dealer every single month. Imagine how many cars are bought. Why are dealerships so rich when you look at their car lots full of cars, but they’re making bank. This is one of the ways. What we do and the importance of the range becomes optimizing your profile, so your range isn’t a 630 up to a 720. Your range in this case, 680 to 700. That’s the range of your scores. Those are very near approvals. When you go in, you’re not going to see a $55 difference. What you’re going to see is a $5 to $10 difference if there’s any at all.
It’s the same tier. Remember, what we say all the time, we’re not score-sensitive, we’re profile-sensitive. If we develop a profile where our target for you is to make a 5 to 10 point spread max. No matter where you go, no matter what bureau they pull, you’re going to get the same price and quote. Nobody can run this game on you even if for some reason you didn’t remember to get a pre-approval in the credit union or your local bank. If you do this, they can’t play that game with you because every single score is the same. You don’t have that 630 hanging out there that they can use against you.
Another way to combat this if you know what you have, we bought my daughter her first car. She’s headed to college and she needed a reliable vehicle. I hate buying cars. I don’t like it as a process. We found a car online. It was a pretty cool process. We got it and drove it back home. When I was talking to the dealership, I said, “I need to know if you can pull in Experian.” He said, “Why?” “Because I knew Experian on every possible score was my highest score.” I told them straight up, “Do you have anybody that can pull only Experian because I know the other two bureaus’ score.” They said, “Sure.” They pulled a couple, but we walked away with a low-interest rate.
Notice knowing what the rules of the game are going to do versus our client who’s still trying to get his legs under him. He’s able to still have the dealer’s help if it’s required. We’re not saying don’t ever do it. If you need to do it, just be prepared to know. Go in with your highest score like what Brad did.
We went in and we got a low-interest rate with her as a co-signer. Here’s the interesting thing. Obviously, I approved on my own, I have a little better rate, but we’re building her credit. We’re doing exactly what Merrill talked about, which was putting her on as a co-signer on your installment loan that she’s going to have for at least 2 to 5 years. We’re building up her profile and creating a fundable life from there. That’s the idea behind shopping for a car. Don’t let them shock you because they don’t need to make $45 a month off of you. That is it for my questions. Again, Info@CreditSense.com, you can give us a call if you want at 801-438-9090. We’re happy to answer your questions, give you some insights and help you become more fundable. We’re going to keep changing the vibe of the lender environment one borrower at a time. We’ll see you next time.