5 Things to Consider Before Adding or Becoming an Authorized User
There are several reasons to consider becoming an authorized user on someone’s credit card or adding an authorized user to your account. It can be a good way to provide a spouse, child, or other loved one with the ability to purchase things on credit. And—if the credit card company reports account activity to the credit bureaus for both the primary account holder and the authorized user—it can be a good way for an authorized user to build a credit history. Especially if they’re just getting started with credit or attempting to rebuild their credit.
But there are several things both parties should consider before either decides if entering into an authorized user relationship is the right move. Here are questions to ask:
1. Will Account Activity Appear on the Authorized User’s Credit Report?
If the primary reason for adding an authorized user is to help them build a credit history, the first thing the authorized user and primary account holder need to know is whether the card issuer reports account activity to the credit bureaus for both parties. If they do, all activity on the account will appear in the credit reports of both parties. If they don’t, then the authorized user arrangement may not make sense for either party.
The decision to include the authorized user in account-activity reporting is completely up to the card issuer, and policies vary by company. Credit One Bank, for example, only includes the authorized user in its reporting if the authorized user is the primary account holder’s spouse.
2. What Is the Primary Account Holder’s Payment History?
If, as an authorized user, your goal is to build a credit history, it’s important to choose a primary account holder who has a solid payment history. This means a positive history of consistent, on-time payments, which is the biggest factor in calculating a person’s FICO® Score.
If the primary account holder has a payment history on the account riddled with missed or late payments, and this pattern continues after the authorized user is added, this could hinder more than help an authorized user’s efforts at building a positive payment history.
3. What Are the Primary Account Holder’s Spending Patterns?
As an authorized user, you don’t need to be concerned with the primary account holder’s spending patterns from a liability standpoint. That’s because the primary account holder is solely liable for all purchases on the account, including those of the authorized user.
But there is cause for an authorized user to be concerned with the primary account holder’s spending patterns. While payment history has the greatest influence on credit score, it’s not the only factor used to calculate it. The amount of credit used, compared to available credit—known as credit utilization ratio—is also included in the calculation. Experts typically recommend keeping that ratio below 30 percent.
So, even if the primary account holder pays their bills on time, if account activity is reflected on both parties’ credit reports, a high credit utilization ratio can adversely affect the credit scores of the primary account holder and the authorized user.
4. What Are the Authorized User’s Spending Habits?
As a primary account holder, adding an authorized user to your account is a big deal because, as mentioned, you’re ultimately responsible for any purchases they make with the credit card. So, before you agree to make someone an authorized user, it’s important to have an idea, and be comfortable with, how much they plan on purchasing with the card each month; how they plan to pay you back, if that’s part of your arrangement; and what the consequences are if they abuse their charging privileges or don’t pay you back.
5. What Is Your Relationship?
Whether you’re thinking about adding an authorized user to your account or becoming an authorized user on someone else’s, it’s important to consider your relationship with the other person before pulling the trigger. Do you trust each other enough to enter into this type of relationship?
Because financial arrangements with friends or family can create stress and change the dynamic of your relationship, it’s important to establish ground rules about what is expected from each person up front. This may involve discussing things like, what happens if the authorized user spends more than was agreed upon or doesn’t repay their charges in a timely manner. Will they be removed from the account? Will the account be closed? You may even want to create a simple contract that outlines each person’s responsibilities and the consequences if those responsibilities aren’t met to help prevent any misunderstandings or hard feelings down the road.
Discussing these details ahead of time could go a long way toward making the authorized user relationship run smoother and preserving the relationship the two of you already had.
Becoming or adding an authorized user can be a convenient way to provide someone in need with credit. It can also be a good way to help them establish or rebuild a credit history. But it is not without risks—for both parties. That’s why it’s important to carefully consider whether it’s the right decision for you and the other person. Openly discussing the pros and cons, expectations, and consequences could help make it a winning arrangement for both parties.