Adding an authorized user to your credit card is a great way to help someone build or rebuild their credit. However, it's important to understand the implications and potential risks involved. If a friend or family member has asked you to add them as an authorized user on your card, here's what you need to know to protect your own credit along the way.
What is an authorized user?
An authorized user on a credit card is someone who has been given permission by the primary cardholder to use their credit card account. The authorized user typically receives their own card with their name on it, linked to the primary account. They can make purchases, but they're not legally responsible for paying the bill. And they have limitations: Authorized users generally cannot make changes to the account, such as requesting credit limit increases or adding other users. The primary cardholder can remove an authorized user at any time.
The primary cardholder still holds all responsibility
When you add an authorized user to your credit card, you remain fully responsible for all charges made on the account. This includes:
Paying the full balance, regardless of who made the purchases
Ensuring timely payments to maintain good credit standing
Handling any disputes or issues with the card issuer
It's crucial to understand that you're taking on financial responsibility for the authorized user's spending habits.
What happens to the authorized user's credit
Your account activity is usually reported on both the primary cardholder's and the authorized user's credit reports. Adding someone as an authorized user can significantly impact their credit profile:
The credit card account will appear on their credit report.
They benefit from the primary cardholder's positive payment history.
The account's credit utilization ratio affects their credit score.
The length of credit history may improve if the primary account is older.
Here lies the main appeal of this arrangement: It can help an authorized user establish or improve their credit score relatively quickly, perhaps so that they can secure a credit card of their own.
Of course, this assumes that your credit habits are strong. You may be trying to give your teen a head start on their credit history, but any late payments or high balances can negatively impact both the primary cardholder's and the authorized user's credit scores. Before adding someone, ensure you can consistently make timely payments and keep utilization low to avoid unintended harm to either party's credit profile.
An authorized user's credit history won't affect yours
It's important to note that while you're helping the authorized user build credit, their existing credit history or future credit activities outside of your shared account won't impact your credit profile. This means:
Their past credit issues won't appear on your credit report.
Any other accounts they have won't affect your credit score.
If they're removed from your account, the account will no longer appear on their credit report.
Tips for adding an authorized user to your credit card
1. Choose wisely: Only add someone you trust and who demonstrates financial responsibility.
2. Set clear expectations: Discuss spending limits, payment responsibilities, and how the card should be used.
3. Monitor account activity: Regularly review statements to ensure the card is being used appropriately.
4. Educate the authorized user: Explain how credit works and the importance of responsible use.
5. Consider setting spending limits: Many credit card issuers allow you to set individual limits for authorized users.
6. Keep communication open: Maintain an ongoing dialogue about the account's status and any concerns.
7. Know how to remove an authorized user: Familiarize yourself with your card issuer's process for removing an authorized user if needed.
8. Protect your personal information: Don't share your online account login details with the authorized user.
9. Regularly review your credit report: Ensure the account is being reported accurately for both you and the authorized user.
10. Be prepared to take action: If the arrangement isn't working out, be ready to remove the authorized user to protect your credit.
Before adding an authorized user, carefully consider your relationship with the person and their financial habits. Clear communication about expectations and responsibilities is crucial to avoid potential financial and personal conflicts. And at the end of the day, you can help someone build their credit while minimizing risks to your own financial health.