Authorized users: 3 common scenarios for sharing a card account
How to manage various card pair-ups, based on credit quality, age and relationship
Personal finance journalist with an eye for industry news
Sharing a credit card account is a delicate dance, and if you’re not careful, you may end up stepping on each other’s toes and hurting each other’s credit.
When you add someone to your credit card account as an authorized user, your card’s history will appear on the other person’s credit report. It can be a kind gesture to someone whose credit history is in need of a boost or nonexistent. The borrowed credit history of a card with a long record of on-time payments and low credit utilization can help your guest qualify for loans or their own credit cards, with no benefit to you other than having done a good deed.
But sharing a card account with someone also can blow up in your face or theirs. If the authorized user takes his account access as an invitation to overspend on your card, you could be on the hook for more debt than you can pay back. (An authorized user is not legally responsible for any debt incurred on the account.)
Payment history is the most important factor in FICO’s traditional credit scoring model, and a missed payment can drop your score by 110 points and stay on your credit report for seven years. Using too much of your available credit hurts as well – credit utilization accounts for 30 percent of your score, and maxing out a card can cost you up to 45 points.
Conversely, if you’re the account owner and you miss payments or run up too much debt, those negative actions hurt the other person’s credit as well as yours. But it’s easy for an authorized user to escape an account that’s gone south through no fault of his own, and to recover from the damage by just asking the issuer to be removed from the card.
Creating financial stress for another person inevitably causes tension. The potential for a card-sharing arrangement to wreak havoc on both people’s lives depends on your respective credit profiles and the quality of your personal relationship. Here are a few common scenarios, and how to manage them.
1. Helping someone
with bad credit or no credit
Sharing your spotless account with someone who is trying to recover from past mistakes is risky. An authorized user with a troubled credit history has little to lose from abusing your account, aside from ruining your personal relationship.
Chances are you’ll want to remove someone who has trashed your credit from an account you own. But when an authorized user is removed, the account’s history generally falls off that person’s credit report within one or two billing cycles. The authorized user’s credit quickly recovers while yours can continue to be penalized, perhaps for several years.
“There’s a reason why people have bad credit – they don’t pay their bills and they’re not responsible with finances,” said Mike Sullivan, personal finance consultant at Take Charge America.
But Sullivan said it may be worth taking a chance if you truly believe the person is worth the risk and you consistently monitor the account. One option to help avoid any overcharging is to never give that authorized user a card of her own, but just keep it safely tucked away at home. An authorized user doesn’t have to use the card to have it show up on a credit report.
Pairing up with someone who is new to credit may be less risky than someone with bad credit because a “newbie” has never had a chance to make a credit mistake. But a credit neophyte may not fully understand how his use of the account can affect your credit score. And there’s no guarantee that a person who has never taken out a loan or owned a credit card will turn out to be a responsible borrower.
If you’re sharing a card with someone who has bad or no credit, stay on top of the authorized user’s spending by carefully reviewing account statements. You also can sign up for transaction alerts via email or smartphone, if your issuer offers them, or ask the issuer to set a low credit limit on the authorized user card. Most importantly, establish a set schedule for receiving repayment from the authorized user for any purchases made.
“At the end of the day, you must cover yourself and review your [credit card] statements on your own, even if you made a verbal arrangement with the other person to pay the card,” said Cynthia Villarreal, a credit counselor at GreenPath Financial Wellness.
Video: 3 ways kids can build credit
The risk of an older consumer sharing an account with a younger person is similar to sharing with someone who has bad credit or no credit. A teenager or young adult may have little or no experience with credit, and many make their biggest financial mistakes when they’re young.
Video: 3 ways kids can build credit
But this kind of partnership can cause family tension, as many parents share card accounts with their children to help them establish credit early in life. Maggie Baker, a Philadelphia-area financial therapist and psychologist, said sharing a card account can be a good financial “teaching moment” for parents and children, but it also can cause personal strife.
“If there’s not much trust between the parent and the adolescent … then there’s a lot of conflict and tension over spending,” Baker said.
Parents have more leverage to set boundaries with their children than anyone else, particularly if the child is still financially dependent. It’s important to set ground rules – perhaps even a spending limit or requiring permission before using the card – and strictly enforce them for as long as the child is an authorized user on the account.
3. Sharing with a thrifty
or spend-y spouse
Many marriages include one person who is a saver and another who is a spender. And financial strain is a common cause of marital stress. So, is it a good idea for spouses with different money habits to share a card account?
“When I do premarital financial counseling, I always tell people to not mix your credit any more than you absolutely have to,” Sullivan said. “If one spouse has significantly better credit than the other – and that seems to be the case in the majority of couples I’ve worked with – it’s even more important that they do this very carefully.”
Adding your spouse as an authorized user can certainly help his or her credit score recover from any past mistakes. But it’s important to establish an understanding of how the card account will be used and set some boundaries as people’s money habits tend to persist throughout their lives.
“You can’t simply make someone a good credit risk,” Sullivan said. “Somebody who is a shopper is likely to continue to be a shopper, and somebody who’s a saver is likely to continue to be a saver.”
If you and your significant other have wildly divergent views on how money should be spent, it may be best to keep your credit separate.
“If you already have those extremes, you’re going to have such different attitudes about money,” Baker said. “That’s a setup for disaster.”
Approach shared cards
as a business deal
Sharing a card account with someone is essentially a business partnership. Whether you’re the account owner or the “guest” cardholder, it’s best to establish guidelines, use the card responsibly and be honest and transparent with your card partner about your spending.
“I advocate making a written contract between people,” Baker said. “It’s a good idea to write down the conditions and also an exit plan. It clarifies for everybody so there’s less chance of misunderstanding.”
A successful card partnership built on mutual understanding can boost one person’s credit and strengthen the bond between both people.
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