How to Use Your Credit Card to Boost Your Family’s Credit Score
- First-generation Americans and many people of color often have little or no credit.
- This is due, among other things, to the bias of the credit scoring system.
- But adding a family member as an authorized user to an account in good standing can change things.
We were in the middle of brunch and started talking about credit scores when my client told me she had never checked hers and didn’t even think she had one.
She was 26 and didn’t have a credit card or student loan, so we braced ourselves for a low or none
“Oh!” she said, surprised.
She had a credit score of over 800 and that indicated she had a credit history of over 30 years.
My client immediately called her mother. Turns out her mom added her as an authorized user on an old credit card when my client was 16 and never told her. The credit card was in good standing, had a low balance, and had an older credit history than my client.
I helped her apply for her own credit card that day.
Black and Latino Americans have lower credit scores on average, preventing them from building wealth
Not all of our customers’ credit stories at Brunch & Budget start out like this, especially our customers of color. While the modern credit scoring system has only been around since 1989, access to credit has become another huge hurdle for Black and Latinx Americans.
According to a 2021 study by the Urban Institute, the average credit score of white borrowers is 725, more than 100 points higher than black borrowers, who have an average credit score of 612. Latinx borrowers have an average rating of 661 (note that “the study did not include Asian Americans, Pacific Islanders, and other racial and ethnic communities due to the small number of ZIP codes in which a majority of residents identified as these groups”).
This means black and Latino borrowers have less access to credit cards, car loans, mortgages and other debt products. Lower credit scores mean higher interest rates when able to qualify for these loans.
Lenders aren’t the only places that check your credit.
companies charge up to 91% more premiums to people with low credit scores. Utility companies, cell phone companies, and banks often use credit scores to determine whether they will jump you through additional hoops to use their services or deny you altogether.
Many of my clients are #FirstGenKids, which means they could be the first generation in their family to have a credit score in the first place, or to have a “good” credit score. Communities of color tend to have more borrowers with credit scores below 620, the rating considered “subprime” for lenders. Nearly 1 in 2 borrowers (45%) in majority black communities have credit scores below 620, compared to 1 in 5 borrowers (18%) in majority white communities.
Adding a family member as an authorized user can open up opportunities to build wealth
Brunch with my client above was when I first learned how powerful the Authorized User could be. We often recommend our clients of color to find ways to use the authorized user strategy to increase the credit rating of their whole family.
An authorized user is someone added to a primary cardholder’s account. The Authorized User technically receives a credit card and can make purchases on the card, but has no obligation to pay the balance. It’s your risk as the primary cardholder, but you don’t have to give the card to the authorized user or even mention that they have been added. Clients have used this strategy to obtain credit for their loved ones and family members for the first time or to help them rebuild their credit.
If you are added as an authorized user on a credit card, all card activity is now reported on your credit report and calculated as part of your credit score. The downside for the Authorized User is that if the primary cardholder misses a payment or increases the balance, it will also negatively affect the Authorized User’s credit score.
You can add anyone as an authorized user and most major credit card companies have no limit on the number of authorized users you can add. Although there is no legal age limit for adding someone as an authorized user, most credit card companies have their own age limit policies. American Express, for example, requires your child to be at least 13 years old.
If that sounds intimidating, I understand. For this strategy to work, you must have a good credit rating and ensure that the card you use remains in good standing. The weight of this responsibility may seem heavy.
On the other hand, imagine being able to leverage your access to credit to boost your partner’s credit score to qualify for a mortgage, give a credit score to your cousin who just moved into the country or start building your child’s credit at an early age. 13. Wealth is not just about assets, it’s about access.
The credit system, like most financial systems, is intentionally designed to confuse, frustrate, fear, and embarrass you and your family. It’s not for us, but we can do it for us. If generational wealth starts with you, use this simple strategy to give your family better access to the credit system so you can all thrive.