The Credit Benefits of Being an Authorized User Are Short Term
Americans with “nepo baby” credit scores are risky borrowers, a new study finds. But that doesn’t stop them from getting better deals on loans, mortgages and more.
Young adults who were authorized users of their family members’ credit cards experienced credit score increases of nearly 30 points compared to others their age, despite having no credit history of their own, according to an analysis of 16 years of credit data by researchers at Rice University and the University of Wisconsin-Madison.
Initially, the benefits of a “big” credit score help the authorized user, the researchers found, allowing them to access more types and varieties of credit before building their own financial history — an effect the researchers named “nepo credit.”
Over time, however, credit scores for “nepo” borrowers tend to decline over time, as this group may be at least 90 days behind on their payments than those who had similar initial credit scores but did not benefit from “nepo credit.”
“In other words, credit histories systematically increase credit scores relative to actual credit quality,” the researchers wrote.
Initial benefits of ‘nepo credit’
The practice of adding family members to credit cards as authorized users — often before they are old enough to borrow on their own — is growing in popularity. About 16% of 21-year-olds are considered authorized users, nearly doubling since 2010, according to the survey.
Previous research from the Federal Reserve shows that about 35% of all credit card holders have at least one authorized user on their account.
Depending on how long they have been designated as authorized users, credit scores for “nepo” borrowers increase from 22 to 42 points, a new study found. For some lenders, an authorized user can be added before 13 years of age.
Overall, borrowers in their 20s typically have a credit score of about 680, much lower than the national average of 715.
An increase of up to 42 points early in their financial life puts them firmly in the “prime borrower” category (typically 660 to 719), opening doors to loans, mortgages and job opportunities they might not have access to otherwise, the researchers found.
Specifically, approved users were 2.7 percent more likely to get approved for a car loan and 2.9 percent more likely to get a home loan than borrowers without that leg.
And, when approved, higher credit scores allow them to qualify for better terms, such as lower interest rates, on loan products.
In “back-of-the-envelope” calculations, the researchers estimated that a gain of 30 credit points translates to about $13,265 in interest savings on a $350,000 30-year fixed rate loan. For a $25,000 five-year car loan, the benefit would be $340.
The results of increased credit scores
The credit score benefits of being an authorized user don’t last forever.
The data shows that the more a person’s credit score benefits from “nepo” credit, the more likely that person has a higher delinquency on their credit report.
Overall, borrowers who were approved users were 0.5 to 0.8 percent more likely to fall behind on their loans than those who earned their credit scores “naturally,” the researchers said. And for those with longer credit histories for approved users — in other words, borrowers who are likely to see the biggest score boosts — the likelihood of 90-day delinquency is 1.7 to 1.9 percent higher.
After a few years, this results in the “borrower’s” credit score falling into a zone that better reflects their creditworthiness.
But, researchers note, that’s after they’ve already been able to get a home or car loan.
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