Why am I being penalized because my parents put me on their credit card account?

Question of the week: Why am I being penalized because my parents put me on their credit card account?

Answer:  You are what is known as an “authorized user.”

Like millions of other parents, Leslie and I have a credit card that accumulates points for an airline’s frequent flyer program. The airline has regular flights between Boston, where our oldest goes to college, and New York City, where our youngest is matriculating. When they went away to school, we obtained a card from our account for each of the girls to use for emergencies, booking flights home, or special occasion when Dad gets to be hero and say, “use the card and take a few friends out to dinner…”

Neither of the girls has any liability on their purchases, or ours. If Leslie or I do not make any payments, the bank that has the account cannot go after either of them for payment. They have signed no documents agreeing to any terms of use, nor responsibility. They did not ask for the cards.

 If I were to pull a credit report on either child it would show their student loans, with them as joint account holders with me, and it would also show the credit card account for which they have a card. The credit card account would be marked “Authorized User.” Which acknowledges that they have no responsibility, however the card still shows on their report and very importantly impacts the credit score and qualifying.

Let me repeat. If you are an authorized user on an account, have no liability for payment, the balance, monthly payment, and payment history will be on your credit report—and impact your score.

Consider your parents put you on an account for emergency purchases. They make a major purchase, say appliances for a kitchen remodel, and the balance is $20,000 against a high credit limit of $21,000.

Your credit score will be lower because the balance is a very high percentage of the available credit.

Your parents have an automatic payment to be taken out of their checking account every month for the minimum payment due to ensure they do not miss making a payment while on vacation, lost bill, etc. They have an issue with their bank account getting compromised and have to close their checking account and open a new account. Because of timing, or forgetting about the autopayment, or some other reason, they do not change the account being used for the autopay with the credit card company.

The credit card company’s computer initiates a transaction to make the minimum payment of $600 for the $20,000 balance on the card. Your parent’s bank rejects the transaction because the account is closed. With all that is going on between the remodel, the change in checking account, or whatever else. The account is not paid and becomes 30 days late.

This reports on your credit report and impacts your credit score.

You and your spouse enter escrow to purchase a new home and have a 30-day escrow for $750,000 with 20% down. When we pulled your credit report for pre-qualifying two months ago your middle score was 787, the authorized user account with your parents was not an issue because there was a very small, $250, balance.

We update our credit report as we set up your application and your middle credit score is 719 because of the large balance on the card and the 30-day late payment for the prior month.

For rates and pricing, we use the lowest middle score, in this case 719. With a middle score of 787 the rate for the transaction is 3.125%, a payment of $2570 per month; at 3.25% the payment is $2611, a difference of $41 per month. Not a whole lot of money when looking at a home worth three-quarters of a million dollars, but it is almost $500 per year, $2500 over five years. All for something for which you had no responsibility for what occurred, no liability for the payment, no say in whether you were provided a credit card or not.

What can be done? We can clear up the report and increase the score, however we need the individuals responsible for the account to notify the credit card company they want to remove you from the account, then though our credit report vendor we file a request for correction, which initiates an investigation by the credit bureaus. The bureaus contact the credit card company, who in turn confirm the authorized user has been removed from the account. Once we are notified the bureaus have made the correction, we pull a new credit report and receive a higher score.

Not a particularly onerous process, however with the stress of buying a new home, the uncertainty that something will go wrong, an added step that you must go through, all for something which you have zero control over.

The listing of credit accounts on authorized users credit reports falls on the credit card companies. The only reason this occurs is to extend responsibility to others should the primary account holders’ default or have late payments. Why this is legal is beyond me. I have a hard time using the word “fair.” Too often it is used to say something is not “fair,” when it actually is as what is the object of being described as not fair is in fact an expected consequence of a behavior or action. In the instance of authorized users having their credit impacted by an account for which they have no control is, by my definition, unfair.

I keep hoping with all the consumer protection regulations and laws that someday the authorized user credit reporting will change. Maybe someday when a politician, or federal bureaucrat, or their children, are negatively impacted it will change.

Have a question? Ask me!

Despite the economy opening up some in February, retail sales dropped 3% from January. Part of the decline could be the weather in parts of the country not in the Southwest, part of the decline was due to the large boost in January when a round of government stimulus checks hit the street, and a big part of the decline was due to consumers waiting for their next check from the $1.9 trillion stimulus package that was just passed. The expectation is for March to see a surge in spending as those checks hit bank accounts, weather improves, more government regulations restricting the leisure and hospitality industries are lifted and cash registers begin to ring.

No change, no matter what the data is. This was essentially the news out of the Federal Reserve this week. Despite predicting a 6.5% growth in GDP this year, despite seeing inflation breach the 2% Fed inflation target, the Fed announced that it is committed to keeping rates extremely low through the end of 2023. This could be a diversionary comment by the Fed, if the announcement had been that they would look to start raising rates in late 2021 or early 2022 then we would see rates spike as investors react ahead of the hikes.

Rates for Friday March 19, 2021:  We continue to see large shifts in the Mortgage Backed Securities market daily, with upward pressure. As we end the week we see the conforming rate flat from last week and the high-balance rate push up from last Friday.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.875% Flat

30 year high-balance conforming                   3.125%  Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

I had the opportunity yesterday to listen to a question-and-answer session with Ben Bernanke, Chair of the Federal Reserve from 2006 to 2014. I was excited to hear what he had to say in light of the pandemic economy, and particularly the $5 trillion in stimulus funds from Congress and two Administrations pushed into the economy in twelve months.

My excitement was unfounded as much of the talk centered around the Great Recession and the how’s and whys of action taken by the Fed and federal government. An interesting story was of Bernanke going with then Treasury Secretary Henry Paulson to see President Bush and telling him that the government had to act to prevent AIG from going under, otherwise the financial industry in the United States, and globally, would completely fail. Bush told them they had to convince Congress, because of this thing called the Constitution.

Some interesting take-aways regarding the current economic situation were, that we will see very strong GDP and employment growth in the coming year; that the financial system is not, and was not, in chaos and while hit hard due to the pandemic, the strength of our financial institutions prevented a large scale economic crisis; he is not concerned about housing prices rising too quickly and creating a bubble due to better mortgages and the price rise is due to people moving out of cities to bigger homes and very low interest rates.

I was hoping the moderator would ask Bernanke if there was too much stimulus too quickly. Instead, there was a focus on the national debt in relation to GDP. Bernanke had an interesting take in saying that it is necessary for government to take on debt in a temporary emergency, such as war or a pandemic. Regarding the national debt being higher than our national GDP, Bernanke sort of shrugged it off by saying that the extremely low rates, being lower than inflation, made the money cheap for the government and therefore manageable.

While Bernanke is a very learned economist, has two degrees in economics from Harvard, a Ph.D in economics from MIT, was Chair of the Fed, is one of the most published economists of our time, and a huge baseball fan…I disagree with his tolerance and seeming encouragement of the tremendous amount of our federal debt.

Yes, rates are near zero now for the government to borrow, but much of government borrowing is refinancing prior debt. This means that most of our current debt at near zero rates, will in the future have higher rates, exponentially increasing the payments on that debt, which must come from taxes and fees to businesses and consumers. How long will it take to payoff when each succeeding Congress and Administration ignore the long-term impact of growing liability for future generations? At what point is the situation no longer manageable and to what consequence.

What I very much enjoyed during the webinar was a discussion that was more personal and delved into his love of baseball. We agree on the need to eliminate the designated hitter and getting rid of the rules put in place last season where when a game goes to extra innings both teams start with a runner on 2nd base. Unfortunately he is a Nationals fan, further proof that those who travel to, and stay, in Washington D.C. for a prolonged period are corrupted in some way.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog