Adding an authorized user to your credit card account to help them improve their credit might seem like a great idea — until they rack up a bunch of charges you’re on the hook for.
Although there are clear benefits for the authorized user, there can be negative consequences for both of you if you’re not careful. Let’s dig into the advantages and disadvantages of adding an authorized user on your card.
1. It can help the authorized user build credit
In 1974, Congress passed the Equal Credit Opportunity Act. This law requires lenders to report information on spousal authorized user accounts to the credit bureaus. Lenders also must consider this information when making credit decisions.
But since creditors don’t specify whether an authorized user account is owned by a spouse, all authorized users get the same treatment. As a result, adding an authorized user to a credit card account with good payment history can give their credit a boost.
Other positive aspects of your account also will transfer to the authorized user’s credit history, such as a low credit utilization ratio and how long the account has been in good standing.
That’s why adding your child as an authorized user on your credit card while they’re in college is a great way to help them build credit. It’s also a good way to help someone rebuild their credit after bankruptcy or another negative credit event.
2. It also can hurt the authorized user’s credit
A positive credit history can lift an authorized user’s credit score, but a negative credit history can drop it. Adding an authorized user to your account when it has late payments — even if they’re in the past — and high balances can be damaging to their credit.
Before you add an authorized user, discuss your account’s history with them so there aren’t any surprises.
3. The authorized user isn’t liable for any purchases
When you add an authorized user, they receive a credit card that’s tied to your account. Since they’re not a joint account holder, though, they aren’t legally responsible for paying off their purchases.
So even if you have a personal arrangement with the authorized user, the credit card company will go after only you if the account is delinquent.
In my experience, some credit card companies don’t even specify which purchases came from you and which ones came from the authorized user. If this feature is important to you, American Express is one credit card company that offers it.
If you’re adding an authorized user solely to help them improve their credit, you can avoid these problems by not letting them use the credit card at all. They’ll still get the benefits of your use of the account. Otherwise, make sure to have a clear plan for who owes what.
4. You generally can’t limit an authorized user’s spending power
By adding an authorized user to your credit card, you’re giving them the keys to the kingdom, so to speak. For example, if you have a $10,000 credit limit, the authorized user can spend up to that much if it’s available.
Fortunately, some cards allow you to set spending limits:
- American Express is the only major credit card company that allows you to limit and monitor what authorized users spend on all its personal credit cards. The card issuer also allows you to freeze authorized user cards and get spending alerts.
- The Costo Anywhere Visa Card by Citi allows you to set monthly spending limits. The card also shows which cardholder made which purchases.
- Many business credit cards — including cards from American Express, Bank of America, Chase, and Citi — allow you to set spending limits for authorized users who are presumably employees. In most cases, activity on a business credit card doesn’t affect an authorized user’s credit score. Check with the card issuer before applying to learn its terms.
5. Adding and authorized user can strain your relationship
Adding an authorized user to your credit card requires mutual trust. You must trust each other to use the account responsibly to avoid negative credit and financial implications.
If something goes wrong, it could result in blame and resentment, which can impact your relationship. Although the benefits of being an authorized user can be significant, they’re not worth destroying a relationship over.
Set expectations before adding an authorized user
Before adding a loved one or employee as an authorized user on a credit card, have a frank conversation about expectations. Set some ground rules you both agree to follow.
All things considered, there’s no right or wrong answer when it comes to whether you should add an authorized user to your account. As long as you know the consequences and communicate effectively with your authorized user, you can help them build or rebuild their credit successfully.
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