Children who have their parents' high credit scores added to their own accounts are significantly more likely to default on their debts.
Adding a young adult as an authorized user on a parent's card creates an artificially high credit score that doesn't reflect their actual financial habits. This inherited creditworthiness masks the real risk that these borrowers pose to lenders. We think of this practice as a helpful leg up that helps young people get started in life. Instead, it builds a house of cards that reinforces inequality while hiding potential market failures. It allows people with no financial discipline to access loans they cannot actually afford to pay back.
Nepo Credit: The Effect of Borrowed Credit Histories
SSRN · 6066806
The intergenerational transfer of credit histories through authorized user (AU) status affects credit outcomes. About 16% of young adults benefit from AU status each year, gaining credit histories that pre-date their own financial activity. Using variation in the age at which individuals are added as AUs, we identify substantial gains to AU status: credit scores rise by 22-42 points, and access to credit cards and credit in broader markets increases. However, AU borrowers are more likely to defa