Are you feeling kind and willing to help someone you know build their credit? You can add them to your credit card as an authorized user. This lets them use your card in your name without being the primary account holder. It’s an excellent strategy for those who are new to credit to build their history.
However, adding someone as an authorized user to your account has its risks, so it’s essential you are aware of them before you agree to anything.
Katie Bossler, a quality assurance specialist at GrenPath, a nonprofit financial group, told Money.com that taking someone on as an authorized user is beneficial since building credit happens over time.
According to Experian, one of the three major credit bureaus, an individual must “have an open and active account for three to six months before a credit score can be calculated.” If the person you know wants a high credit score, it can take even more time.
But when you add an authorized user to your credit card, they can build their credit rating much faster. They get the best of both worlds: they can enjoy the buying power that credit cards offer while also sharing your payment history, utilization rate, and credit history.
These factors all impact their score. Instead of taking the stairs, you essentially offer them a ride to the top on an elevator.
“For anyone who’s new to credit, understanding how to responsibly use a card is such a great thing, and this can be a good opportunity to help that person along,” Bossler told Money.
This strategy is particularly useful for younger consumers who don’t have credit cards, auto loans, or any income to begin with. But, like anything else, adding someone you know as an authorized user on your account can have its drawbacks.
For you, as the account holder, you put your score on the line. If the user starts to miss statements or maxes out your credit card, your rating can take a big hit.
The circumstances may get worse if the other cardholder goes on a spending spree and racks up a steep balance on your card. It’s important to remember that your credit card is not a joint bank account, so the responsibility does not fall on the user. The financial burden will fall on you, even though you didn’t make the purchases.
“He’s not left holding the bill,” Bossler explains. “He’s not responsible for paying it back.”
While on-time payments are the most important factor influencing your credit score, the utilization rate is less clear. Typically, lenders look for borrowers with a credit utilization ratio under 30%.
Madison Block, a marketing communications and programs associate at American Consumer Credit Counseling, notes that it’s easier to rack up debt when two people use the same credit card.
For example, if you have a $1,000 credit limit, you may decide not to spend over $300 per month. But if you add someone else to the card and they spend the same amount, your credit utilization ratio will soar. At the same time, your credit score will drop.
If you decide to help somebody you know this way, Block advises making a plan upfront. “You have to agree ahead of time with that authorized user, that ‘Hey, each of us can only spend $150 a month.”
It goes without saying that you should only add someone you trust completely. Whether it’s a sibling, family member, or a friend, Bossler suggests having a heart-to-heart before you add them to your account.
As you talk, set your expectations and the conditions for using your card. You should discuss spending limits, payment terms, and what happens if they accrue a balance. After that, keep a close eye on your account activity.
Adding someone close to you, especially a relative, can be a difficult subject to address. “We’re blending family and money,” Bossler says. “If things don’t go well, it can be a strain on the relationship.”
When it comes down to it, taking someone on as an authorized user on your credit card account can benefit them greatly. However, you should think carefully before making a decision. It requires trust from both parties: you trust the user to use your card responsibly, and they trust you to pay your bill on time each month.
Although the liability falls on you, there are a few ways to monitor the user’s spending. You can order a credit report from AnnualCreditReport.com for free each week until 2021. You can also allow push notifications that alert you when they make a transaction.
Of course, you can remove the person from your account at any time. “You remain in control,” Bossler notes. “You can add them on but also take them off.”
- Credit Karma Staff. “What to Know About Being an Authorized User on a Credit Card.” Credit Karma, 23 Nov. 2020, www.creditkarma.com/credit-cards/i/authorized-user-credit-card.
- Glum, Julia. “Kind but Risky: Before Adding an Authorized User to Your Credit Card, Consider These Crucial Factors.” Money, 12 Oct. 2020, money.com/credit-card-authorized-user-credit-builder/.