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A Simple Way to Build Credit for the First Time

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You need to have credit to get credit. It's the classic catch-22 of personal finance.

And it makes sense. Your credit score is, after all, built on your credit history. No credit history means no credit score. And no credit score makes lenders hesitant to give you even small amounts of credit.

So how does anyone get credit in the first place? There are slow-and-steady ways to begin building credit. Opening a bank account, paying bills in your own name, and using a secured credit card are sound approaches to building a solid financial foundation.

But one of the easiest ways to build credit is to become an authorized user on someone else's credit card account. It's known as "piggybacking." You're riding on another person's creditworthy coattails.

Becoming an authorized user is simple, and it's one of the faster ways to build a history of good credit. Before becoming an authorized user, however, first understand exactly how this helps build your credit. Then, be sure you understand the risks involved.

What is an Authorized User?

An authorized user is one who can use another person's credit card. It's common for parents to add a child to their credit card account as an authorized user. Then, the child can use the parents' credit card as needed.

An authorized user can charge the credit card, and has most of the same card-related privileges as the credit card owner. Authorized users generally are not, however, liable for the debt. Importantly, there is no credit check required to become an authorized user. As a result, one can become an authorized user even if they have bad credit or no credit at all.

How to Become One

You can't add yourself as an authorized user to someone else's credit card. But if a family member or friend agrees to add you, it's easy to do. Most credit card issuers let the cardholder add an authorized user in a matter of seconds online.

The Good

By becoming an authorized user on someone else's credit card account, the account is reported on your credit file. The payments made on the account each month are reflected on the authorized user's credit, as are the credit limits, type of account and utilization.

That's what makes this the easiest way to build credit. You don't have to spend a dime to build a credit history. And authorized users are not obligated to pay on the credit card, even if the cardholder racks up a ton of debt that he or she doesn't pay.

The Bad

Being an authorized user is a two-edged sword. While it can help you build a good credit history, it can also have negative effects. If the card holder makes payments late or charges the credit card to limit, these negative credit items will appear on your credit history.

And, unfortunately, as an authorized user, you have no control over what happens with the credit card account. You can, however, remove yourself as an authorized user should this happen.

The Ugly

There is a dark side to authorized users. It's often called piggybacking or credit boosting. It occurs when individuals are added as authorized users for the sole purpose of increasing their credit scores. It often involves an individual with bad credit paying a fee to be added to another person's (often a complete stranger) tradeline.

Credit bureaus are well aware of this practice and have implemented ways to detect it. While the FICO scoring model continues to consider legitimate authorized user accounts (e.g., when a parent adds a college-bound child to a credit card), they have taken steps to detect and exclude accounts flagged as authorized user abuse.

Being an authorized user can be a first step to building credit. It's important to be sure the credit card holder is handling his or her credit responsibly. And avoid any schemes involving a fee to be added to a stranger's account.

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