AYF 89 | Authorized Users

 

What are authorized users?  In this episode, Merrill Chandler takes a more in-depth look into the truth about authorized users. There is so much misinformation about authorized users, especially now with so much personal or global financial crisis. What you do and how you allow other people to interact, or how you interact with other people’s accounts can be a deal-breaker. Listen to Merrill as he shares some details about why you should allow any authorized user for your accounts or not. Also, take note of how they can affect your financial profile.

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The Truth About Authorized Users

We’ve got an awesome subject matter for this episode. We’re going to be talking about authorized users. There’s so much misinformation about authorized users, especially when we have a personal or global financial crisis. What you do and how you allow other people to interact or how you interact with other people’s accounts can be a deal-breaker. We’re going to go all the way with authorized users and their impact on your fundability. I am thrilled to be addressing you in a completely different way about authorized users. We are going to be talking about it in a way that you are associated as a user or you give permission to somebody else to use your accounts. If we do it wrong, I’m going to tell you not to do it at all because you are subject to losing the account or not providing what you think you’re giving to the person you’re trying to hook up.

What is an authorized user? Authorized User or an AU is someone who you give permission to use a credit account. This is not a joint account. You’re not a signer on the account. You’re authorized to use the account. If you get a card, you may be given a card that has its own sixteen-digit number, which is different than the owner of the account. An authorized user gets to charge up. Let’s say it’s a $10,000 limit. You get to use any amount you wish unless the owner of the account puts a limit on it. For example, there are personal accounts where you’re an authorized user and then there are business accounts. I will never under any circumstance have somebody be an authorized user on one of my accounts on personal. Me and my partners, they are authorized users on corporate accounts, on our business accounts.

The rules are different for personal and business. We’re going to address all of these little variations. The first time I was introduced to authorized users was when we were in college. One of my friends was excited because he got his mom’s credit card in the mail. He was like, “My mom sent me a credit card.” I was like, “What does that mean? Do you get to use the account?” He said, “Yes, it’s for emergencies. I keep it in my pocket in case I need to use it for an emergency.” That was my introduction to what became known as authorized users. In an authorized user relationship, these were some particular questions that we asked when Brad and I went back to FICO 16. That’s the first time that we had a big conversation. We had several days in a row of different meetings with the FICO score developers. One of the questions we asked is, “How do you guys score authorized users?” I’m paraphrasing this, but it’s near a quote. They said, “We’ve gone back and forth on whether or not to give points to an authorized user.”

In the system, which was FICO 9, the software does not give any value to an authorized user. FICO 8 did give value to an authorized user and it was calculated at 40% of the points. Let’s say the owner of the account would get 100 points for having that, the authorized user will only get 40 points. What they did say specifically is that while they only get 40% of the points in FICO 8 software and none of the points in FICO 9, they get 100% of the negative impact if the owner goes late. If the account goes delinquent, gets charged-off or goes to collections, the authorized user gets the same 100% of the negative impact, not 40%, as per their borrower profile. Brad and I were looking at each other going, “Explain this. Why would that be?” What we were told is the math algorithm does not know who did the charges. We know who’s responsible for the account so we’re going to give 100% of the positive points to the account holder because they’re responsible.

Here’s the weird thing. Even if the authorized user is making the payments, the owner of the account gets credit for the on-time payments. Since we don’t know who is making the charges and charging up the account, if it goes south on the owner, we’re also going to hit the profile and count the full impact against the authorized user because we don’t know who did the charging. I connected some dots after the fact in our discussions because if the owner of the account is taking a hit, let’s say it’s a twenty-year-old account. It’s paid as agreed perfectly and they put an authorized user, 6, 12 or 24 months, whatever it is, then it goes south.

That’s why FICO is saying full hit against the authorized user. Depending on the software version, there is little to no benefit to being an authorized user. There is a total negative possible impact if the account goes delinquent. That’s the first thing we’ve got to establish is what is it worth being an authorized user. As my friend in college, if you are giving a credit card to a son or a daughter for emergency purposes, I understand you are making sure that they have resources in case there’s an emergency. The problem is if you go south, your son or daughter is going to have bad credit. We’re navigating this looming recession. We don’t know what the owner of the account is going to be.

Authorize users get, depending on the software, very little or zero positive benefit. Click To Tweet

It’s perilous times for authorized account users. If you’re an authorized user and you’re trying to use that account to build your credit, which doesn’t work. If you’re becoming an authorized user to raise your credit score or improve your credit at these perilous times, you’re at risk because we don’t know what’s happening. Whether it’s a parent who’s letting a child or for some individuals who purchased a tradeline and you’re an authorized user on somebody else’s account. That whole business, buying tradeline is a perilous business all on its own because you’re a complete stranger to the owner of the account. Somebody said, “I’ll pay you $1,000 to let somebody be an authorized user.”

The authorized user pays $25,000 to the broker to become an authorized user. The owner made a $1,000 and the authorized user doesn’t get an account or a card in this case. He can’t use the account for all intents and purposes. They made $1,000. They’re like, “That was easy street. I have no problem. I’ll do that five times and sell that tradeline.” FICO knows that it is a rat. To use the nomenclature from our borrower totems, that’s a fox strategy, gaming the system. FICO started discounting those authorized users completely. You’re at risk if you’re an authorized user and we’re moving into perilous times, especially if you don’t know the person. If you’re a family member of someone and they gave you a card, I don’t think they’re going to say, “I’m not going to make my payment this month. Detach your authorized user status from my card.”

Since we’re talking about this strategy if you are the owner of the account and you do have an authorized user. It can be a son, daughter or somebody who’s in your family or a partner, and you’re going to go late, then by all that is credit wholly, make sure you take them off as an authorized user before it goes negative. That is a survival strategy that you have to implement. The survival strategy that we need to have in mind is being able to take authorize users off of our accounts while we go southbound. If you’re in the process of creating this relationship, I highly recommend that you don’t. If you’re an authorized user, you are not getting a boost. You may have a boost depending on the score that’s being evaluated.

Those software versions FICO 8 versus FICO 9, you may get a boost in the score, but as anybody who’s read my book, who has tuned in to my shows and who’s gone to my Bootcamp knows that score is in charge of rate and term, not an approval. No one’s going to approve you for a high value of bank card, auto loan or mortgage based on your score. It’s based on your profile. All of the industry-specific scores that we discuss in my book and Bootcamp are all based on the approval valuations, not on the scores. Scores are in charge of rate and term. If you see your score go up, don’t get excited. You’re not fundable. That is not contributing to your fundability. Ultimately, you’re at risk of being harmed.

I want to tell you a story. Brad tells this story about one of the clients that he coached. I’m going to paraphrase it the best I can. There was a client who worked his hindquarters off qualifying for a Chase credit card. It was part of his optimization plan. We had a lot of work to do to get him into a position. Finally, he got approved. I believe the amount was a $15,000 limit. He was excited. He worked hard to get it and it was super valuable to him. Remember the training that he had been given, he wanted to hook up his friend and be able to say, “I’ve got one. I’m going to hook you up. I’m going to make you an authorized user.” That tradeline mechanism and misconception is out there in the markets. You can google it and be like, “Buy and sell tradelines. Make money with good accounts.” FICO has already gutted that entire process, but people are making money. If you don’t know the rules of the game, it’s not your fault.

If you’re reading, learning and saying, “We need this to be different. We’ve got to know the rules so that we can take the right action.” This gentleman was excited to share with his friend to give him a leg up. It was all a good-natured. He wanted to give his friend a leg up by believing the old stuff and for completely forgetting all the training that he had received. He hadn’t talked to his team about how this decision might impact him. He made his friend an authorized user on the account. His friend had bad credit and it had been focused significantly on revolving accounts. It wasn’t 30 days. It wasn’t 30 days to the next reporting cycle, after our client got his account and they shut his credit card down. The one that he’d worked so hard for, Chase shut it down. When he called to inquire as to why, it was because he had made a person with a derogatory revolving account profile with bad borrower behaviors, he had given that authorized user status to somebody who had the right to charge up and use the accounts.

There are other things that we can illustrate other bad borrower behaviors, but I want to stay focused on this. He lost his hard one relationship with Chase because he put a wrong person on as an authorized user. That person gets evaluated by the underwriting software. Like what we teach everywhere, the automatic underwriting software is following your behaviors. Let’s use that as a cautionary tale. We do not want to put people on as authorized users who are going to destroy our relationship with the lender, especially when it’s the hard one. Let’s do a summary. Authorized users, depending on the software, get very little or zero positive benefits. If you get a benefit, the only benefit is a subtle rise in score. Scores don’t get approvals of any kind of meaningful credit. You can get a Victoria’s Secret or a Home Depot and you might get approved, but it’s not going to get you any bank cards.

AYF 89 | Authorized Users

Even if the authorized user is making the payments, the owner of the account gets credit for the on-time payments.

 

That subtle raise in the score is not going to help you establish any meaningful credit as an authorized user. There are other strategies to do that of which we discussed in the Bootcamp, in the show, etc. Don’t do it. If you have an authorized user, make sure there are steps to remove somebody from your profile. If you’ve given somebody access for the last ten years to a 360-month account, then you’re in a pickle because there’s a lot of value that has been added to their profile. They’re not fundable, but there’s traction there. You take them off. You remove that from their profile and they’re going to lose that 360 months. It’s landmines everywhere. That’s why I’m telling you don’t do it. If it’s something you’ve done, stop doing it and get rid of it. Protect your profile before you protect somebody else’s. This is not cutthroat, dog-eat-dog. I’m telling you that you’re not giving them much.

In many cases where it is a recent add-on, if they’ve been there for many years, we need to talk. If it’s relatively new, under 24 months old, then it’s something that can be mitigated by removing them. I was in a strategy session and somebody asked, “Can I put somebody on as an authorized user to give them that leg up?” I gave him this exact speech. That’s why we’re having this conversation. Here’s the problem. If you put somebody on, even temporarily and then take them off, that authorized users stays on their profile for ten years from the date of closure. You’ve got a tradeline that is meaningless but being calculated in some to your detriment. There are other strategies to build your profiles, rather than buying a tradeline and becoming an authorized user. Back in FICO 542 days in the ‘90s, that was a thing. There were entire piggybacking strategies, but FICO does his job to prevent fraud and to make sure that they are protecting lenders as best as possible.

Subsequent iterations of the scoring software have diminished any value that authorized users used to be. One of the things that you need to remember about authorized users is there is no marginal benefit and there is a total huge potential downside. If an authorized user is done for financial purposes only like for children or somebody for emergency purposes only, you still need to ask whether or not it’s worth it because you’re not helping them build a profile. Once they take them off because they start establishing their own revolving credit accounts, hopefully, tier one, 100% contribution accounts, they’re going to have a closed authorized user or a removed authorized user for ten years from the date that it was removed. That tradeline, closed or open, is rookie borrower behavior, including sharing it as an owner. If you’re the owner of the account and you share it, it lands in the rookie borrower behavior because you’re not helping that individual establish a true fundable borrower profile.

We’ve got awesome things going on here. I’m thrilled that you have been able to join me. If you have any questions or comments, put them in the feed. Let me know what you think about this because this is a hotly debated topic for people who don’t know what FICO is measuring. You learned it here first that we are here to help you build, preserve and maintain fundable borrower profiles. Being a recipient or the deliverer of an authorized user is not going to help you do that. I’m glad you could join me in this episode. Make sure that you color inside those fundable lines and we will make it through our personal and global pandemics. Have a spectacular rest of your day. I will see you on the inside.

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