Do Tradelines Really Work to Improve Credit?

A tradeline refers to any account listed on a credit report, detailing a borrower’s credit activity. Lenders report these records to credit reporting agencies like Experian, Equifax, and TransUnion. This information is then used to calculate an individual’s credit score.

Understanding Tradelines

A tradeline is a record of a credit account on an individual’s credit report. It includes details such as the creditor’s name, account type (e.g., credit card or car loan), credit limit, outstanding balance, and payment history. It also notes the account’s opening and closing dates.

A distinction exists between primary accounts, where an individual is solely responsible for the debt, and authorized user accounts. An authorized user is granted permission to use another person’s credit card but is not legally obligated to make payments.

When an individual is added as an authorized user, the primary cardholder’s account information, including payment history and credit limit, may be reported to the authorized user’s credit report. The credit card issuer must report this activity to the major credit bureaus for it to appear. The account typically appears within 30 to 45 days.

Impact on Credit Scores

Tradeline data directly influences credit scores, calculated by models like FICO and VantageScore based on several factors. Payment history is the most impactful, accounting for 35% of a FICO Score and around 40% for VantageScore. Credit utilization, the amount of revolving credit used compared to total available, typically makes up 30% of a FICO Score. Lenders prefer a low credit utilization ratio, ideally below 30%.

Length of credit history, including the age of the oldest account and the average age of all accounts, generally accounts for 15% of a FICO Score and around 15-20% for VantageScore. A diverse credit mix, representing various account types, contributes about 10% to a FICO Score.

When an authorized user tradeline appears on a credit report, it can influence these scoring factors. An older, well-maintained tradeline with a long history of on-time payments and low credit utilization can positively contribute to the authorized user’s payment history, length of credit history, and credit utilization ratio. For example, a low balance relative to a high credit limit can reflect positively on the authorized user’s report, potentially boosting their score.

The effect can vary based on the individual’s existing credit profile and the tradeline’s characteristics. Individuals with a limited credit history may see a more noticeable impact from a seasoned tradeline. If the primary account holder mismanages the account, such as by making late payments or carrying high balances, this negative activity can also be reported and potentially harm the authorized user’s score. Some credit scoring models may also limit the impact of authorized user accounts to prevent system manipulation.

Regulatory and Industry Perspectives

Credit bureaus and major lenders acknowledge authorized user accounts as a legitimate part of credit reporting. While the Fair Credit Reporting Act (FCRA) allows for their reporting, their addition can be scrutinized. Many major credit card issuers report authorized user accounts to all three credit bureaus: Equifax, Experian, and TransUnion.

Credit card issuers are not legally mandated to report authorized user activity. They retain discretion to choose what information they report and to which bureaus. This means not all authorized user accounts will appear on an individual’s credit report, and policies can vary between issuers. Some issuers might stop reporting authorized user accounts if the primary cardholder misses a payment.

Historically, authorized user accounts have been used in ways perceived as attempts to manipulate credit scores, leading to adjustments in scoring models. For example, a major credit scoring company initially announced in 2007 that it would no longer factor authorized user accounts into its upcoming scoring systems. After consulting with federal regulators, this position was reconsidered, and authorized user accounts continue to be considered in credit score calculations today.

Despite their inclusion in scoring models, the industry maintains authorized user accounts are primarily intended for genuine relationships, such as family members. Lenders evaluate an applicant’s entire credit profile. While an authorized user tradeline can provide positive data, it is just one component. Its effectiveness depends on attributes like age, payment history, and credit utilization, as well as the overall context of the individual’s credit report.

Building Credit Effectively

Building and improving credit can be achieved through consistent, responsible financial practices. Making all payments on time is a primary strategy, as payment history is the most significant factor in credit scoring models. Setting up automatic payments helps ensure bills are never missed.

Managing credit utilization involves keeping the amount of credit used low relative to available credit limits. Financial experts recommend maintaining a credit utilization ratio below 30%. This is accomplished by paying down credit card balances regularly and avoiding maxing out credit lines.

Establishing a solid credit history is beneficial, as the length of time accounts have been open and active influences credit scores. Individuals new to credit can open a secured credit card, which requires a cash deposit as collateral equal to the credit limit. This card allows for the demonstration of responsible credit use, as payments are reported to credit bureaus just like unsecured cards.

Credit builder loans offer an avenue for establishing or rebuilding credit, particularly for those with limited or poor credit scores. With these loans, the borrowed amount is held by the lender in a savings account or certificate of deposit. The borrower makes regular payments over a set term, usually 6 to 24 months. The lender reports these on-time payments to credit bureaus. Upon successful repayment, the borrower receives the initial loan amount, minus any interest or fees.

Maintaining a diverse credit mix, including revolving accounts like credit cards and installment accounts like personal loans, can contribute to a stronger credit profile. It is not advisable to open new accounts solely for this purpose; instead, responsibly managing existing and necessary credit products is the objective. Regularly reviewing credit reports for accuracy and disputing any errors can help maintain a healthy credit standing.