Should You Add an Authorized User to Your Credit Card?
Whether you are considering joining someone else’s credit card account or you are the current account holder looking to add a person, entering into an authorized user relationship is a move to consider carefully.
As the authorized user title suggests, anyone added onto an account under this designation is authorized to make charges. The authorized user even gets a credit card with his/her name on it. The charges made by an authorized user will show up on the primary account holder’s bill and the authorized user will not have legal responsibility to pay those charges. For these reasons, it is a good idea to weigh the potential positives and negatives for all parties.
The act of an individual contacting a creditor and adding an authorized user onto a credit card account not only allows the authorized user to have the use of the credit card to make charges, but it also generally allows the authorized user to have the primary account holder’s credit history show up on his credit report. This can be a tremendous benefit for anyone who is having trouble building a credit history on their own, since an authorized user does not need to go through a credit check to be added to the primary cardholder’s account.
However, because some creditors may not report information to credit bureaus on behalf of authorized users, it is important to ask the creditor involved if it reports this kind of information before going to the trouble of creating the authorized user relationship.
When that authorized user later wants to apply for individual credit, it will also be important to find a potential creditor that uses a credit scoring model that factors in authorized user information. Otherwise, the authorized user may not have a credit history on which a potential creditor can base a lending decision.
The FICO scored developed by Fair Isaac Corporation, the most popular credit score among major lenders, uses authorized user information in its credit scores as long as there is no evidence that the authorized user has been added to a stranger’s account for the purpose of capitalizing on the stranger’s good credit. However, Fair Isaac models starting with the FICO® 08 model forward substantially reduces the benefits to the credit history of authorized users.
For a person who wants to create access to funds for someone else – like a parent who wants a child to have some degree of financial independence – an authorized user relationship has the advantage of coming with a record of how the allocated funds are used in the form of a credit card statement.
This can often be preferable to using cash, since both parties can review the authorized user’s transactions together to strategize the best use of the funds that are provided. Adding a young person who is away from home – at college, for example – as an authorized user can also give the young person access to funds for emergency purposes or while travelling.
While there is nothing inherently negative about adding an authorized user to your account or being added as one, if the authorized user runs up large charges, this will result in a higher monthly bill for the primary account holder and create a difficult situation for everyone.
If the authorized user goes so far as to make charges large enough that funds are not available to make the monthly payment on the credit card, this could result in late payments and eventually show up on credit reports.
Furthermore, multiple back-to-back late payments could trigger collection actions or lawsuits against the primary cardholder. A large bill could also result in a lower credit score for both the primary account holder and the authorized user since simply using a higher percentage of the available limit on a credit card can have a negative effect.
- It is important that anyone added as an authorized user is familiar with techniques for keeping credit card account information secure, including:
- Only using the credit card at trusted locations or websites
- Not giving out credit card information via email or text
- Carrying the card only when it is needed
- Shredding all credit card statements
- Monitoring all swipes of the credit card to guard against concealed, fraudulent charges at stores or restaurants
- Checking all credit card receipts for accuracy
It is vital for both parties to understand how an authorized user will make charges with the credit card. Put an agreement on paper and have everyone sign it. This should help to avoid any misunderstandings or disagreements about how the card is to be used.
Some credit cards allow for a credit limit to be set for an authorized user’s charges, so taking advantage of this feature could greatly reduce the chances of a charge being made that does not conform to the agreement between the involved parties.
Monitoring credit card transactions closely is another way to head off any problems before they become major headaches. It is a good idea for anyone with a credit card to check the account history online at least once a week for occurrences of identity theft or mistaken charges, but when there are multiple users for an account it is especially important to monitor the online statements because a lack of watchfulness and communication could mean accidentally making charges that put the account over its limit if the account holder has “opted-in” to be able to charge above the card’s limit.
If a late payment of 30 or more days is imminent on the credit card, the authorized user will want to be removed from the account, since the late payment will damage his credit. If an authorized user decides for this or any other reason to be removed from an account, the authorized user can simply call the creditor to request that this action be taken.
While adding someone as an authorized user can help that person’s credit score, it is usually used as a temporary measure designed to transition that person into taking on a greater credit responsibility. A secured credit card, for which a deposit is placed as security for repayment of the card, can be a good option for building or rebuilding credit. A secured credit card has the advantage of being entirely in the individual’s own name and not potentially putting another person’s credit at risk.
Student credit cards can be a solid choice for the college-bound. Because of the Credit CARD Act of 2009, a young person applying for a student credit card may need the signature of a parent, but the responsibility ultimately rests with the child to use the card responsibly. Student cards tend to come with lower credit limits to reduce the risk to the creditor. Parents and children should review together all the details of any card offer – fees, annual percentage rate (APR), grace period, etc.
A final option is to make someone a joint account holder instead of an authorized user. Adding someone to a credit card account as a joint user instead of an authorized user means that the information from the account is more likely to be factored into any future lending decisions for the person who is added. The advantage to the cardholder is shared legal responsibility for account payments. As with an authorized user, adding someone as a joint account holder is a decision to consider with caution.