The Benefits of 'Nepo Baby' Credit Scores Don't Last Forever, Study Finds

Americans with “nepo baby” credit scores are actually riskier 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 on their family members’ credit cards get a credit score boost of about 30 points compared to others their age, despite having no credit activity of their own, according to an analysis of 16 years of credit data by researchers at Rice University and the University of Wisconsin-Madison.

At first, the "substantial" credit score gains serve to benefit the authorized user, the researchers found, allowing them to access more and various types of credit before they've built up their own financial history — an effect the researchers coined “nepo credit.”

Eventually, though, the credit scores for “nepo” borrowers tended to decrease over time, as this group is more likely to fall at least 90 days behind on their payments than those who had the same initial credit scores but did not benefit from “nepo credit.”

“In other words, the borrowed credit histories systematically inflate credit scores relative to true 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’re 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 study.

Previous research from the Federal Reserve shows that about 35% of all credit cardholders have at least one authorized user on their account.

Depending on how long they were designated as authorized users, the credit score boost for “nepo” borrowers ranges from 22 points to 42 points, the new study found. With some lenders, an authorized user can be added as early as 13 years old.

Overall, borrowers in their 20s typically have credit scores around 680, which is far lower than the national average of 715.

An increase of up to 42 points at the start of their financial lives puts them firmly in the “prime borrower” category (usually 660 to 719), opening doors to loans, mortgages and even employment opportunities they may have not had access to otherwise, the researchers found.

Specifically, authorized users were 2.7 percentage points more likely to gain approval for an auto loan and 2.9 percentage points likelier to get a mortgage than borrowers without that leg up.

Plus, when they were approved, the higher credit score allowed 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 30-point credit score advantage translates to approximately $13,265 saved on interest for a $350,000 30-year fixed rate mortgage. For a $25,000 5-year auto loan, the advantage would be about $340.

The consequences of inflated credit scores

The credit score benefits of being an authorized user don’t last forever.

The data shows that the more one’s credit score benefited from “nepo” credit, the likelier that person was to have a serious delinquency on their credit report.

Overall, borrowers who were authorized users are 0.5 to 0.8 percentage points more likely to fall seriously behind on their debt payments than those who earned their credit scores “naturally,” the researchers said. And for the ones who received long authorized-user credit histories — in other words, the borrowers who likely saw the biggest score lift — the probability of a 90-day delinquency was 1.7 to 1.9 percentage points higher.

After a few years, this leads to the credit scores of “nepo” borrowers falling to a place that better reflects their creditworthiness.

But, the researchers note, that’s after they already got access to a home or car loan.

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