Joint Accounts and Your Credit Report: When They Can Help
In the current credit crisis facing the nation, some consumers are looking at creative ways to help boost their credit score in an attempt to qualify for necessary credit. Using joint accounts as a means to prop up your credit score may help, but there are definite pitfalls to consider before making the decision to try this option.
Applying for joint accounts or having a cosigner is nothing new in the world of credit. Generally speaking, the idea is that you benefit from the cosigner’s good credit in order to qualify for your loan. Or, in the case of joint accounts, you share the account with a person whose credit is in good standing. In both of these instances, the aim is to give you access to immediate credit, either in terms of a car loan or credit card account, which you then use to build on your own good credit. This can be effective over the long term, assuming that payments are made on time and the account is kept in good standing.
However, with the current credit freeze in place, trying to build credit in this way can prove difficult, as lenders are reluctant to extend new credit in many instances, and FICO may no longer take into consideration authorized users on an account. Because of this, some individuals are looking at joint accounts in a different light. Rather than using a cosigner to help secure a new line of credit, some individuals ask a relative or other trusted associate to add them to an already existing account that has a solid payment history and a low debt to available credit ratio.
This helps in two ways – the solid payment history on the account is now reflected on the individual’s credit report, which may improve the credit score. And the low debt to available credit ratio means that as the individual pays down his or her own debts, the credit score may improve more quickly. In return, the individual generally agrees not to have access to the account, other than in name only. Ideally, the account in question should have at least two years of solid payment history, and a debt to credit ratio of no more than 35%.
If you use this method to improve your credit score, you should be aware that all the standard caveats apply – and this can become particularly risky if the person whose account you are sharing falls behind on the payments. However, as an authorized user of the account, you may be able to remove yourself from the account in question if it goes beyond 30 days past due. This is different from cosigning a loan, in which case you would be fully responsible for the debt, regardless.
While careful use of joint accounts can improve your credit score, it does not take the place of making timely payments on your own accounts, and you may not see as much of a boost with this method as you would by hiring a credit repair company to assist you with removing erroneous information. However, if you don’t have much credit on your report, and you have a friend who is trustworthy and willing to help you with your situation, joint accounts can help to improve your credit score and help you to qualify for credit in your own name. Just remember to monitor your credit report regularly, and make certain that you are free to drop your name from the account without penalty when the time comes.
