Authorized User Abuse is a problem for lenders and borrowers alike, though some consider it as an effective credit repair tool.
At first, being an authorized user has a good side. Authorized user option allows a family member, such as spouse and children or close relatives, to be added to an existing account. The authorized user can use the credit cards for charges but won’t be responsible for the payments. This is mostly applicable to parents who send their teenage children to college. This doesn’t create credit risk since the relationship is known and it is done for necessity.
The method, however, is abused by some. Some borrowers pay third parties in exchange of getting the third parties’ names added to the borrowers’ accounts. The third parties won’t have to use the cards and thus the practice increases credit capacity and decreases credit utilization. It is obviously a way to improve the borrowers’ credit scores. If the borrower pays on time, this information will be present in his and the authorized party’s credit report, therefore benefiting them both.
The problem is that the presence of this practice is determining the reliability of the credit reports and credit scores issued by credit bureaus. It may not be illegal, but it is deceptive and could hurt the banks and bureaus. When people starts complaining about their credit reports and credit scores, the financial institutions usually take the blame. Of course, for people who got denied of a credit application will complain that some unqualified borrowers they know got approved, and them not.
Banks and lenders stand undefended. Authorized User Abuse poses as a threat to them and affects them more. Customers who are actually high-risk appear credit worthy. This increases default risk and the lenders may not even know this.
FICO 08, the new credit score system formulated by Fair Isaac Corp., was released last couple of years and is now used by the two of the biggest credit bureaus – TransUnion and Equifax. The third major credit bureau claims that they have implemented the new FICO system through their Beacon 09.
The new scoring system will use a new formula that would not include authorized user in their calculations. It may appear to the credit report but the credit score computations won’t have it as a variable.
This can help lenders to obtain more accurate scores from the credit bureaus. Lenders will be able to approve credit to worthy people and avoid approving credit to those who are high risk.
Even with the new FICO scoring, the abuse won’t still be reduced totally and significantly. Many lenders are also basing their decisions on other credit scores and other pieces of information, such as credit history. This means that many financial institutions are still exposed to default risk.
