Recently I discussed selling tradelines as a way to generate extra income. If you are unfamiliar with tradelines, read my prior article first.
A quick recap: Tradelines are bank accounts. In this case we are talking about your credit card accounts. You can add an authorized user (AU). Adding an AU to a credit card account in not unusual by any means; the credit card companies encourage the activity. Selling tradelines (adding an AU you don’t know so they can increase their credit score) is gaming the system in the opinion of the banks. The reason selling a tradeline to a complete stranger is frowned upon is that fraud can take place. You may be completely unaware of the fraud, but the banks have risk so they don’t like it. There is nothing in it for them except risk so they close accounts they suspect of selling tradelines.
Adding an AU to your account is not unusual. The credit card companies actually encourage the activity. You may be familiar with the emails they send you recommending you add AUs.
Friends and Family
Starting out is hard for young people as they cross the threshold of adulthood. One moment they have no legal authority to sign loans or make important financial decisions and the next day, on their 18th birthday, they are thrown into the mosh pit of life where they are expected to know all the rules and are responsible for every decision they make financially. Good thing the education system doesn’t prepare them for the fateful day. That might hurt bank profits and we all know how terrible it is for Wall Street when people actually understand a thing or two about finances. Witness the whining of actively managed funds and hedge funds complaining about index funds.
My youngest daughter is months away from the above mentioned mosh pit. My oldest daughter has enjoyed the benefits of adult responsibility for a few years now. From an early age I pounded financial information into their heads. Money wasn’t/isn’t a taboo subject in my household. Money discussions are common and decisions Mrs. Accountant and I make with finances are easily viewed by the younglings.
Life starts without a credit score. Normally I would say credit scores are worthless and not being able to borrow money is more blessing than curse. Unfortunately, credit scores are used to determine auto insurance rates and even can prevent you from finding a place to rent. Your credit score affects your finances even if you never borrowed a plug nickel in your life. A ‘good’ credit score is valuable as it can reduce your expenses without effort, i.e. lower auto insurance premiums.
Adding junior as an authorized user to your credit card can remedy the situation. For the same reason people want to buy tradelines, you want to add people you care about to your tradeline AU list. Have three kids in college? Add them to several of your credit cards. You decide if they actually get the card to use. You can also limit how much they spend or even have the credit card company never send a card in their name.
An important point to remember is to only add the kiddos on accounts you actually use (so it gets reported to the credit bureaus). One small purchase will cause most cards to report to the bureaus. For the kids to benefit, keep the balance low. Once the balance reaches above 15% or so of the credit limit the benefits are diminished. The best way to do this is to put a low level of spend on the card/s you have the kids on and pay it in full each month.
The large amount of unused credit your children now have from being your AU increases their credit score. This in turn lowers their auto and renter’s insurance rates. If they ever need a loan (auto, home, education) they will qualify for lower rates without the need of you co-signing the loan (hopefully).
For the same reasons you want to add the wife/husband or significant other. They do NOT have to use the card or even have access to it! Just by being on the list benefits them. I would caution against giving the kiddos free reign with your credit card or you might end up in the market for credit score improvement yourself.
The Good Boss
The same principles can be used by small business owners. Adding valued employees as AUs can be a powerful tax-free fringe benefit for employees. When an employee experiences a higher credit score she may end up paying less for insurance and may be able to refinance loans at a lower rate. It doesn’t cost the employer a penny while the employee experiences lower costs without additional taxes owed on the lower expense (unless it involves lower deductible mortgage interest).
A few things to consider for employers. Business credit cards usually don’t report on individual credit reports. However, many small business owners use personal credit cards and in my opinion should to avoid a nasty tax surprise connected to basis issues.
Adding employees to a credit card doesn’t mean the employee gets to walk around with said card. It is convenient for certain employees to have access to the tradeline while others will have modest to no access. As long as the balance is low compared to the credit limit and the card is paid in full monthly, the employee should experience a credit score lift.
Selling tradelines have one serious problem. Add more than two or three AUs outside your geographic area and the problems start. The banks sniff out the behavior and consider it a breach of their term of use and cancel the card.
Adding an AU to your account is easy. The banks hate it when someone games the system selling tradelines, but tend to like it when you add AUs they consider legitimate. Family and employees are natural AUs for your account. Your credit is not harmed while they benefit.
The service can be extended to friends as well. If you have concerns, call your credit card company and ask them if it is acceptable to add a friend or extended family member to the account. The worst they can say is no.
Tradelines are recognized as a valuable resource. That is why there is demand to buy temporary tradelines. Selling tradelines requires the constant adding and subtracting of AUs, a real pain in the tail and an indication to the bank you are gaming the system. Selling tradelines could get you blacklisted, a serious occurrence, while adding friends, family and employees generally have the blessing of the credit card company.
Selling tradelines are generally limited, but, with the bank’s permission, you can add a serious number of AUs without incident.
I hope you find this personal finance/credit hack valuable. Use it responsibly and it will serve you well.
You can help the kids without putting yourself at risk by co-signing a loan. The kids can have lower borrowing and insurance costs, too.
Teach your children good money skills and you reduce the risk they’ll return home from a financial catastrophe to live in your basement. In the end, it’s about preserving your peace of mind.