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Authorized users don't have to pay for cardholder's missteps

By

Opening Credits
Columnist Erica Sandberg
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.

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Question for the CreditCards.com expert

Dear Opening Credits,
My daughter was an authorized user on my husband's credit card, but the card has not been paid, and now there is an adverse account on my daughter's credit. She should not have any responsibility for this account. How can we clean this from her credit? She was looking for a student loan but was then denied. (That was when we found out about the card not being paid.) Please help. -- Brady

Answer for the CreditCards.com expert

Dear Brady,
"Credit cleanup on aisle nine!"

Unfortunately, Brady, that's nearly always my initial thought when hearing about shared credit accounts. Why? When two or more people use one credit card, the likelihood of someone paying late or accumulating too much debt increases exponentially. For a visual, picture a shared account as a couple in a supermarket tossing a jar of spaghetti sauce. When the players are careful, the jar remains intact. Yet if there's just one bad throw or dropped catch, the pair is left with quite a mess to mop.

I assume that your daughter is still an authorized user on your husband's account. Such a designation allows her to charge independently with a card that sports her own name, but without being legally accountable for payment. This means that if the creditor were to file a lawsuit for the delinquent balance, it would be your husband -- not your daughter -- who would be named, pursued and hauled into court.

This, however, doesn't imply immunity from other associated problems. A downside to being an authorized user is that the creditor typically reports all credit activity, from payment history to balance information, to each cardholder's credit reports. If payments are made on time and the debt is kept low, the report will be viewed favorably. Conversely, if the activity is negative, lenders and anyone else assessing the report will see the damage, even if it's not yours, and be free to make a judgment. Therefore, though your daughter may not be personally responsible for the unpaid debt, it's having a harmful impact, and she'll have to do some cleanup work to repair her credit.

I took the matter to Steven Katz, director of corporate communications at TransUnion (one of the three major credit reporting agencies), and asked about your daughter's predicament. He stressed that her first step should be to check all her credit reports at all three major agencies, as each company is separate, may have different policies regarding authorized users and must be approached individually. In most cases, the ding will be on all reports, though it will be clear that she is not the primary cardholder.

The good news is that she may be able to have all evidence of the account expunged. According to Katz, your daughter can achieve this goal in two ways. She may appeal to the credit bureau to have it removed via the formal dispute process (which can be a laborious and time-consuming journey). Or, says Katz, "she can ask her father to remove her as an authorized user. As soon as he does, the history of the account will no longer be on her report."

While she's scrubbing down the past, she should also be concentrating on creating a pristine credit present and future. Assuming your daughter is an adult, she can probably get a credit account in her own name. As soon as she starts to charge and repay responsibly, she'll be on her way to establishing her own credit history. She'll also have total account control (and liability).

And now for those student loans: Know that Stafford loans, which are what most students get, are federally guaranteed and are not granted based on credit scores or credit history. Your daughter's reports, whether she removes the detrimental information or not, are irrelevant for qualification. This is not the case for private student loans. I recommend she confer with the financial aid department at the college of her choice or visit a reputable website, such as FinAid.org, to learn about her financing options.

Clearly, your daughter has some work to do if she wants to improve her credit history. Still, the labor shouldn't be too unpleasant -- it just takes a bit of effort to pick up all those messy pieces. 

See related: 10 things you must know about credit reports and scores, 10 ways students can build good credit, How to dispute credit report errors

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Published: September 2, 2009


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