You added a guest to your card. It backfired. What now?
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Credit card account owners should carefully weigh whether to add authorized users to their accounts. Once a card is issued in their name, authorized users have legal access to a credit line and can easily run amok. And if an authorized user runs off after racking up a balance? The account owner can be left with major credit and financial problems.
According to a 2016 CreditCards.com survey, about 86 million people have shared a credit card account. Many of the cardholders are authorized users and not co-signers, which gives them liability-free charging privileges. The account owners, however, bear all the responsibilities.
Before inviting anyone to piggyback on your personal plastic, understand the authorized user relationship.
Here is how to handle shared cards before and after troubles erupt.
When an authorized user becomes an authorized abuser
The motivation to add someone to a card account varies from helping a young family member establish a credit history to less altruistic reasons. For example, wanting the most rewards points, as was the case for Daly City, California, resident Maria Bautista.
Bautista was approved for a credit card that came with a sign-up bonus of 50,000 rewards points. Her goal was to trade the points in for an overseas flight, but she didn’t have enough. When Bautista discovered she’d get 5,000 extra points per authorized user attached to the account, she added four: her two younger sisters, an older brother and her mother.
In the beginning, everything was fine.
“My limit was $15,000, and I did use the card, but I paid it off usually,” says Bautista. “Then I got a bill maybe 10 months later and my card was almost $14,000. My brother went back to the Philippines. I couldn’t find him, but now I had this really, really bad bill! I couldn’t even pay the minimum it was so big.”
In a panic, Bautista called the issuer. “They did nothing except blame me,” she says. “I said, \u2018No, ma’am, it’s not mine,’ and they said it is, and I have to pay. I was crying and begging.”
The representative suggested Bautista contact a credit counseling organization for assistance. “They were nice, but told me the same thing,” she says. “If I can’t find my brother and make him pay, I have to ask my family for money or go bankrupt. My credit is basically ruined.”
Authorized abuses abound on smaller scales, too. AJ Saleem, founder of Suprex Tutors, a startup based in Houston, makes employees authorized users on his business card. The arrangement worked well – until it backfired.
Saleem allowed an employee to spend up to $100 on supplies, but she ran over budget by a couple of hundred dollars on two occasions, purchasing products not on the designated shopping list.
“I had to tread lightly on forcing her to pay, because as an employer you don’t have the power to squeeze money out of an employee,” says Saleem. “In the end, I had to fire her because she abused her power.”
Authorized users are trending
For those wanting to share cards, authorized user status is becoming the only option. In December 2016, Discover became the latest issuer to stop offering joint, or co-owned, cards, joining Chase, Citi and American Express. Co-owned card bills are the responsibility of both parties who sign the application.
However, all the largest card issuers freely allow account owners to add authorized users. When they do, the original ownership remains with the primary account holder. Account management, from paying on time to ensuring that statements are correct, is always the responsibility of the owner. Authorized users may enjoy a card with their name on it and charging rights, but they bear no financial liability to the issuer.
Why take the risk of adding someone to your card? Well, there are some advantages (such as additional rewards points), but it’s usually for the guest’s benefit. The account, including its payment history and credit line, shows up on the authorized user’s credit reports. As long as the account is well managed, it can be helpful to people needing a credit history jump-start.
The onus is always on the account owner
A disaster like Bautista’s highlights the importance of understanding contracts as well as vetting potential authorized users, says Jason Gaughan, a credit card executive at Bank of America.
“The primary user is ultimately responsible for paying the bill, so you need to keep that in mind when adding an authorized user to your account,” says Gaughan. “It is your credit history that will be impacted.”
Authorized users can be removed from the account at any time, and the issuer will stop listing the account on their files. Owners, however, are stuck with any balances.
“You also might consider limiting your exposure by making sure the credit line you are giving them access to use is low,” says Gaughan.
When thinking about adding someone to a card account, the primary account holder should consider the prospective authorized user’s income and reputation. “Prior to adding someone to an account, make sure you have visibility into their financial picture and ability to repay the charges they make on the card,” Gaughan says.
If the would-be authorized user passes muster, draw up a contract that specifies what the card may be used for and outline the repayment terms. And always keep a close watch on the account, reviewing transactions and balances.
Account owners also can decide to keep the cards instead of distributing them. A positively held account listed on an authorized user’s credit report will help them, even if the authorized user never has access to the card.
Be particularly cautious when making minors authorized users, says Priya Malani, co-founder of financial planning firm Stash Wealth, in Williamsburg, Brooklyn. If it’s tough to get teenagers to clean their rooms, imagine how hard it is to force a payment when they’ve taken the card out for a spin.
Whatever the person’s age, authorized user relationships must begin with clear communication. “Start with a conversation,” says Malani. “Explain the plan for this card.” Tell the user what the account is for, and what the terms for repayment are. Talk about accountability and how the user’s actions can affect other people.
All this is too late for Bautista, who says she didn’t ask her brother much before adding him to her account.
“I told him he could have it if he wanted it and he said yes,” says Bautista. “They mailed him a credit card. I did tell him he can use it, that it was OK, but he had to pay me. I didn’t know I had to pay his bill.”
Today, Bautista is still deciding what to do with the debt, and she is considering bankruptcy.
How to deal with the debt left behind
Mark Hankins, a consumer credit attorney and author of “Debt Hope: Down and Dirty Survival Strategies,” says account owners contending with authorized users who ring up a bill and then run away may have some recourse.
The first step is to revoke authorized user status, which usually requires a phone call to the issuer. Then, “if you have decent credit, you don’t want to sit there and wait until your credit is ruined,” says Hankins. “Pay it off or settle it.”
Although more common with collection agencies that have purchased old debts at a discount, some credit card issuers will work with borrowers to lower balances or temporarily reduce a card’s interest rate.
Encourage the rogue to pay
Account owners should still try to get authorized users to reimburse them. “You don’t have a lot of leverage here,” says Hankins. “But you can ask the person to kick in a certain amount every month. Set up a monthly payment schedule.”
Use psychological techniques to influence the person to do the right thing, says Pegi Burdick, a consumer finance behaviorist from Los Angeles.
“You can control an elephant with a feather,” says Burdick. “With softness and gentleness. Sit down with that person, tell them what they’ve done is affecting you, acknowledge that what they’re doing is hurting their own self-esteem – and you don’t want that. People tend to respond to kindness.
“Rather than say \u2018I’m disappointed in you and have lost respect in you,’ say, \u2018I know this is painful, this can’t be easy.’ Then brainstorm repayment ideas together.”
But if the person is inherently unreliable, don’t expect miracles. “If you ask her to sell the piano so you can pay the credit card bill, forget it,” says Burdick. “She’s already proven she won’t, and even if she says \u2018yes,’ she’ll forget about it in 20 minutes.” If that’s the solution, the account owner should take that task on instead, if possible.
In the event talking, cajoling and proposed remedies fail, there’s always small claims court. Account owners have the right to take adult authorized users to court and sue for damages. Each state sets its own dollar limit, but it is typically $5,000, according to courtstatistics.org.
As a last resort, account owners should inform authorized users that unless they furnish the funds, they’ll sue. That could spark action. If it doesn’t work, and the owner sues and wins, a judgment will be placed on the authorized user’s credit report. The judge may enforce it with extreme collection methods, such as wage garnishment and seizure of property.
In a worst-case scenario, an account owner may fall behind on their bill due to the outstanding debt racked up by their authorized users, and the issuer (or collection agency that has the debt) sues. That could result in a judgment against the account owner, and a debt bloated with fees. If so, Hankins recommends looking into a cross-claim.
In layperson’s terms, a cross-claim iswhen the sued owner sues the authorized user who racked up the debt. “Basically, you have a claim against the third party. You wrap it up into one case,” says Hankins. To find an attorney who can help with cross-claims, contact the National Association of Consumer Advocates.
Just don’t blame the issuer for the deadbeat friend or family member. “It is absolutely not the credit card company’s fault,” says Hankins.
“Making someone an authorized user is not a sensible course of action unless you have amazing faith in the other person,” says Hankins. “If you wouldn’t hand them a blank check, don’t hand them an authorized user card. Because that’s not just one check, but a whole stack of them they can use all over town.”