Disclaimer: I always have a difficult choice on whether to report these loopholes because even if they may technically be legal, they certainly are an abuse of the intended law. I do not recommend that people participate on either side of this scheme to raise poor credit scores. That being said, it does exist and I try to pass along to people information of what is going on in all areas of personal finance.
There are a growing number of companies on the Internet that claim they have found the perfect loophole that allows them to boost the credit scores of those with bad credit without breaking the law. They are able to do this by exploiting a common way that children first gain a credit history – piggybacking upon someone (usually a parent) that has good credit by becoming an “authorized user” of the person with a good credit history.
While the authorised user is meant to help children and family members that have little or no credit establish it, the Internet companies are using it to inject the stellar credit history of someone into that of someone with poor credit. This is accomplished by finding people with credit scores above 700 who are willing to add people with low credit scores to their accounts as authorized users. When authorized, all the positive aspects of the high credit score become part of the history of the person with poor credit thus quickly inflating the poor credit score.
Why would a person with a great credit score let someone with a poor credit score be an authorised user of their credit card? The key is that the person with low credit never receives the credit card to use. It is instead sent to the person with good credit who keeps is so that it won’t actually be used. The game is played merely to raise the credit score of the person with low credit.
Is this all legal? It depends which side of the debate you’re on. Federal law permits people to add authorized users to credit card accounts and there is nothing that says there are limits to the number of people that can be added to an account. There is also nothing specifically stated in the law that currently prohibits someone from renting or selling the authorized user designation. This is how the companies are able to operate and still technically be within the law.
For those who have bad credit, it’s costly. It can be anywhere from $500 to over $2000 to obtain an authorized user account on a superior credit history. For this price, the companies claim that they can dramatically improve poor credit scores in as little as a month’s time. Some claim they can raise a person’s score by as much as 200 points in this short amount of time while 100 point increases are normal.
For those letting people use their credit history, there is big money to be made. With many people desperate to increase their credit scores, these sites claim that those with a superior credit score can earn thousands of extra dollars simply by letting others latch onto their good credit.
The companies claim that one good credit rating can get as many as 100 authorized users onto an account and can pay anywhere form $100 to $600 per authorized user depending on how good the credit history is. The length of use is usually six months. That makes the potential earnings for someone whose good credit is worth $300 per authorized user at $60,000 a year.
There are definitely some large risks involved. While the credit card doesn’t actually go to the person who is authorized to use it, it seems that it could be fairly easy for them to obtain an additional copy if they desired. Knowing that you have a good credit history and therefore likely have high limits on your credit cards, it may even encourage people to do so. If they did, they could spend as much as they wanted and you would be responsible for paying 100% of it back since you designated them as authorized users.
All this has caused great concern from the credit reporting agencies who have taken the issue to the Federal Trade Commission which is currently investigating.