Authorized Users: Adding Them, Building Credit & What To Watch Out For
It’s common for parents, employers and couples to add authorized users to their credit card accounts, giving these individuals the ability to make purchases without assuming payment liability or having to qualify for their own cards. This unique type of financial relationship has pros and cons as well as important implications for both parties’ credit standing.
It’s therefore worth familiarizing yourself with the ins and outs of authorized use before opening your financial life up to another party. Continue reading below to learn more.
What Is An Authorized User?
Simply put, an authorized user is someone who is granted access to another person’s credit-card account. Authorized users receive full access to the account’s credit line but are not legally responsible for paying the balance or associated fees that result from their use of the account. Only the primary accountholder receives the bill, regardless of who made charges with the card. As such, this relationship requires both parties to lay out their own usage ground rules.
Once an authorized user is added to a credit card account, the issuer will begin relaying account information to the major credit bureaus on a monthly basis under the authorized user’s name. As long as the account is managed well, the authorized user’s credit report should reflect positive information, whereas account mismanagement (e.g., missing payments or exceeding the credit limit) produces the opposite effect.
If the authorized user has no previous credit history, his or her first credit score should be generated within six months. This score could range anywhere from bad to perhaps even excellent, depending on how the account is managed in the meantime.
If it’s not the authorized user’s first credit account, the credit score ramifications are likely to reveal themselves as soon as the account appears on his or her credit report. The initial impact is likely to be negative, as is temporarily the case whenever a person opens a new credit account, but that will reverse itself with time and responsible use.
Authorized User Pros & Cons
The decision to add an authorized user to your credit card necessitates carefully weighing the risks and rewards, as there are certainly a few of each.
- Valuable Experience: Becoming an authorized user not only enables people who cannot qualify for their own accounts to use plastic, but it also helps them learn how to manage their money responsibly in a low-pressure, relatively low-risk way.
- Credit Building: Most major credit-card companies report authorized users’ account information to the major credit bureaus each month. Assuming the information reflects responsible use, this process will help to improve the authorized user’s credit standing, perhaps elevating it all the way to the “excellent” range over time. However, the gains aren’t likely to come as quickly as if the individual had his or her own credit card account. So for the best results, we recommend combining authorized use with a starter credit card, even if it’s secured.
- Lack Of Responsibility: Authorized users aren’t legally responsible for making payments, which means they shouldn’t be held accountable for the credit score ramifications of failing to do so. As a result, if the account is mismanaged and proves to be more of a credit score hindrance than a help, an authorized user has the right to simply request the account’s removal from his or her credit reports.
- Convenience: It’s simply easier to put a credit card in your wallet than to make sure you’re always carrying enough cash. It’s also easier to manage a single credit card account than it is to keep tabs on a few different ones. The logistical advantages of plastic are therefore often a driving factor for authorized use, especially for families with underage children and couples who pool their money.
- Emergency Spending: No one wants to leave a significant other or other family member stranded with no money for things such as gas, car repairs, alternative transportation or a hotel room. Adding that person as an authorized user on a credit card is one of the best ways to eliminate such concerns, especially when the authorized-user-to-be doesn’t have an independent income source or much credit history.
- Liability: It’s important to realize that the primary account holder is legally liable for everything an authorized user does. In other words, when you agree to give another person access to your account, you also agree to pay for their purchases and deal with the consequences of their mistakes. You can make special, informal arrangements with your authorized user when it comes to payment and other logistics, but the buck ultimately stops with you.
- Possible Credit Score Damage: There will be damage to the credit scores of both the primary account holder and authorized user if the primary account holder misses a payment or even defaults on the account. The same could be true if the authorized user abuses his or her account privileges, causing the primary account holder to have bill-payment problems.
- Possible Relationship Strain: If things go south, people will inevitably point fingers. Blame and resentment can corrode relationships, which means you shouldn’t add an authorized user unless you know that person to be financially responsible — or if you can bear the headache should he or she misbehave.
Who Can Be An Authorized User?
You can make anyone an authorized user on a credit-card account and with little hassle. All you need is the person’s name, date of birth and, in some cases, their Social Security number. There are no restrictions regarding the authorized user’s age.
But just because you can add someone as an authorized user doesn’t mean you should. As the primary account holder, it is your credit score, reputation and money on the line. It’s therefore extremely important that you fully trust someone before making him or her an authorized user.
“Ask yourself if it’s a good idea to get involved in a financial relationship with this person,” said Lisa Bolton, a marketing professor at Pennsylvania State University who focuses on consumer insights. “The more established of a relationship and the more trust between the people, the better off it’s going to be.”
That’s why some of the most common authorized user relationships include:
“There’s some abuse of [authorized use], as well, where actually there is almost no real relationship and people are being put on cards to help people’s credit history,” Bolton said. “That’s not the purpose of it, and that shouldn’t be done because it’s becoming a big problem for credit card companies, and it’s going to put at risk this opportunity for people who are using it for legitimate purposes.”
Adding & Removing Authorized Users
Most credit-card issuers will allow you to add an authorized user over the phone, through a paper application form or online — with the last option being the simplest. After you add an authorized user to an account, the new account should appear on his or her credit report by the end of the next billing cycle. So it could show up in just a few days or take about a month, depending on when in the card’s billing cycle the authorized user is added. The primary account holder’s credit report will not reflect the authorized user’s addition.
Removing an authorized user’s account access is just as easy. All you have to do is call and ask the bank to take the person’s name off of your account. This will revoke their access and deactivate their card.
5 Tips For Awesome Authorized Use
An authorized-user arrangement is not without risks, so it’s important to carefully consider the following tips before dipping your toes in the authorized-user pond:
- Pick The Right Creditor: Credit bureaus treat authorized users as owners of the accounts to which they are added. And though most major credit-card issuers report authorized-user activity to the credit bureaus each month, not all do. Smaller institutions, such as credit unions, are even more hit-or-miss.
- Consider Lenders’ Credit-Score Preferences: The 1,000+ credit scores that are currently in use don’t approach authorized use uniformly. VantageScore 3.0, for example, effectively considers only the good things, as you can request the removal of any negative information related to an account you’re authorized to use. FICO Score 9 heavily discounts information about authorized use relative to accounts for which you’re the primary accountholder. And other scores ignore authorized use altogether. And it’s impossible to predict which scoring model will use — let alone if they’ve customized the score to their industry.
- Make Contingency Plans: You don’t want to be surprised by anything your authorized user might do. So consider how you’d handle various situations that might arise — from overspending to refusing payment — so that you can act immediately if necessary. Setting up account alerts for different types of worrisome transactions — a charge above $100, for example — can be extremely helpful in this regard.
- Have An Open Dialogue: It might be a good idea to schedule periodic sit-downs with your authorized user to discuss how things are going as well as what potential changes you might need to make to your arrangement. Ultimately, open communication is the key to avoiding mistakes and animosity.
Set A Good Example: Negative information won’t directly cost an authorized user, in the sense that the newest credit-score models only consider positive information from such accounts, if any info at all. Nevertheless, info that won’t count against an authorized user also can’t count in his or her favor. That means every month your payment is late amounts to one fewer on-time payment on the authorized user’s credit track record.
If your child is the authorized user you have in mind, you also have to consider what type of example you want to set as one of his or her primary financial role models. There’s a good chance that what you do will be mimicked in some way down the road, so try to leave a fruitful legacy, instilling positive values, not familiarity with bad habits.