- First-generation Americans and many people of color often have little or no credit.
- This is due, among other factors, to the distortion of the credit scoring system.
- But adding a family member as an authorized user to an account in good standing can change that.
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 prepared for a low or no credit score situation.
“Oh!” she said, surprised.
He had a credit score of over 800 and said he had a credit history of over 30 years.
My client immediately called her mother. It turned out that her mother had added her as an authorized user on an old credit card when my client was 16 and she never told him. The credit card was in good standing, had a low balance and an older credit history than my client.
That day I helped her apply for her credit card.
Blacks and Hispanics have lower credit scores on average, which keeps them from building wealth
Not all of our customers’ credit histories at Brunch & Budget start like this, especially our black customers. While the modern credit scoring system has only existed since 1989, access to credit has become another huge barrier for blacks and Latino 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 score 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 postcodes in which the majority of residents identified as those groups”).
This means Black and Latinx borrowers have less access to credit cards, auto loans, mortgages, and other debt products. Lower credit scores mean higher interest rates when you are able to qualify for these loans.
Lenders aren’t the only places that check your credit. Auto insurance companies charge up to 91% more premiums to people with low credit scores. Utilities, cell phone companies, and banks often use credit scores to determine if they will blow you through further hoops to use their services or deny you altogether.
Many of my clients are #FirstGenKids, which means they may 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, which is considered “subprime” for lenders. Nearly 1 in 2 (45%) borrowers in black-majority communities have credit scores below 620, compared with 1 in 5 (18%) borrowers in white-majority 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 advise our customers of color to find ways to use the authorized user strategy to increase the credit score of the entire family.
An authorized user is someone who is added to a primary cardholder account. The authorized user is technically equipped with a credit card and can make purchases on the card, but is not obliged to pay the balance. This is your risk as the primary cardholder, but you are not required to provide the card to the authorized user or even mention that they have been added. Clients have used this strategy to get meaningful credit for others 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 to the authorized user is that if the primary cardholder loses a payment or increases their 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 limits on the number of authorized users you can add. While there are no legal age limits for when you can add someone as an authorized user, most credit card companies have their own age restriction policies. American Express, for example, requires your child to be at least 13 years old.
If this sounds daunting to you, I understand. For this strategy to work, you need a good credit score and make sure the card you use stays in good standing. The weight of this responsibility can seem heavy.
On the other hand, imagine you can leverage your access to credit so that you can raise your partner’s credit score to qualify for a mortgage, give a credit score to your cousin who has just moved to the country, or start to building your child’s credit since 13. Wealth is not just about assets, but access as well.
The credit system, like most financial systems, is intentionally designed for you and your family to be confused, frustrated, fearful and embarrassed. 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 greater access to the credit system so that everyone can thrive.