Daughter's credit in trouble after Mom defaults on shared card

By Erica Sandberg

Opening Credits

Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com. Ask a question. 'Opening Credits' stories

Dear Opening Credits,
I added my then minor daughter as an authorized user on one of my credit cards that has since gone into default. My daughter is now ready to complete the FAFSA application, and I am concerned that it will affect her in a negative way. I have contacted the credit card company, and she has been removed as an authorized user. Is there anything else I need to do? Please help! -- Angela 

Dear Angela,
No need to worry -- you've already taken corrective action by removing your daughter's name from your account.

It's true that authorized users have the same information woven into their consumer credit reports as the primary account owner. This kind of arrangement can work quite well, as long as the owner (who is entirely responsible for the bill) pays on time and keeps the debt nice and low. The authorized user will then reap the positive credit rating rewards.

However, you just described a snag in the fabric. In the event that the account goes into a negative standing, the user's credit report reflects that as well. Yet, even in this circumstance, there are upsides to being a guest on a credit card account. Unlike a co-signing situation, where liability is shared equally among the owners and each person is stuck with the account until it's closed, authorized users can be taken off the account at any time. According to the credit reporting bureau Experian, when that guest status is revoked, the information for that account will no longer show up on the defunct user's file.

Regarding your daughter's credit rating and the FAFSA (Free Application for Federal Student Aid), I wouldn't be excessively concerned about her or your credit rating as long as she's going for government-backed loans, such as Stafford and Perkins loans. These products are the most common types of loans for students and credit history is not a deciding factor for qualification. There is an assumption that the applicant is young and inexperienced and hasn't had the opportunity to develop a pattern.

However, your own credit rating will be a factor if you ever want to take out loans on your daughter's behalf. Many parents do to make up for a financing gap. For example, PLUS loans are very popular. With them, you would be the borrower, so the lender would check your credit and other financial information to determine qualification.

Whether you plan to help with an additional loan or not, I encourage you to get your credit back on the right track. Pay that debt down and use your cards well from this point forward. While the derogatory notation will remain on your reports for seven years, it will become increasingly benign as time passes.

Back to your daughter ... I'd love her to graduate with an excellent credit history. Eventually, she'll be out of college and looking for a place to live. Landlords will pull her credit report and she'll want it to look great. The same may hold true for a job, as some employers may use them to judge responsibility.

Your daughter can probably get a secured credit card in her name now. I recommend them for people who are just entering the banking world. They're fairly easy to get because the credit line is secured by a cash deposit. When she has the card, she should charge inexpensive items throughout the month, and then pay the balance due on time and in full.

I wish you both the best!

See related: Act fast to remove authorized users when your credit goes south

Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.

Send your question to Erica.

Published: January 30, 2013

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