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Dr. Don Taylor, CFA, Bankrate.com advice columnist Authorized user may not be the answer

Dear Dr. Don,
Our daughter (my step-daughter) and son-in-law are looking at buying a home sometime soon. Here's the problem. She has bad credit and he has little or no credit.

Someone told them that he should find a family member who has excellent credit, which my husband and I do, who would put him on one of their credit cards but not give him the card itself. This would give him (the son-in-law) good credit.

Wouldn't this damage our excellent credit? Why would a lender recommend this to them? Can one even add a member to a credit account, if they don't live with them?

This just doesn't sound quite right to me and I wondered if you had any possible answers to this question or where I might find them.
-- Harried Harris

Dear Harris,
You can list your son-in-law as an authorized user on your account in the hopes of having the payment history show up on his credit report and improve his credit score. 

They don't have to live with you for that to happen. That said, creditors are only obligated to report the payment history of an authorized user if that person is the account holder's spouse, so you'll want to talk to the creditor before taking this step to make sure that the creditor will report it. 

If you don't give him actual access to the account, there should be a minimal amount of credit risk to you. Why a minimal risk? Well, he is an authorized user and all he would need to use the card is the account information, and an authorized user isn't obligated to repay the debt.

Another option is to co-sign the mortgage loan. I'm not a big fan of this approach, even for family. As the FTC guide for consumers,"Cosigning a Loan," states: "When you're asked to cosign, you're being asked to take a risk that a professional lender won't take. If the borrower met the criteria, the lender wouldn't require a cosigner." 

Bad credit doesn't last forever. Negative information for the most part stays on a credit report for seven years. The couple won't have to wait seven years to get credit, they just need to build a clean payment history and keep it clean.  

Unless there were extenuating circumstances such as a medical problem or a sustained period of unemployment, people with bad credit typically get to that point by living beyond their means. It's a little easier to jump into the breach with a commitment by the couple to turn things around, combined with a clean payment history, than it is to try to finesse the issue by co-signing a loan or making the couple authorized users on your credit card.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: Feb. 2, 2007
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