If someone you know has bad credit and yours is good, you can help turn things around by adding that person as an authorized user on your credit card account. Authorized users have the authority to spend on your account — though you don’t actually have to give them a card to do so — and can take advantage of your positive credit history to build their own credit.
“Typically, the entire account history will show up on the authorized user’s credit report,” says Gerri Detweiler, education director for Nav, which helps business owners monitor business and personal credit for free. “If the primary cardholder has good credit and low debt, that can be a tremendous benefit.”
There may be advantages for you, too, as the primary cardholder. But it’s important to understand the pros and cons of adding an authorized user to your credit card.
Pros of Adding an Authorized User
Adding an authorized user on your card account allows you to:
— Help a family member or friend build or rebuild credit
— Keep unused accounts alive
— Share a card account with your family member or employee without much trouble
[Read: Best Credit Cards for Bad Credit.]
The biggest pro of offering authorized user status: You can help someone climb their way out of a bad credit situation. After all, it might not be your loved one’s fault that he or she got into financial trouble, says Ed Mierzwinski, senior director of the Federal Consumer Program at U.S. PIRG, a public interest advocacy organization.
“A lot of times, bad credit is not the result of shopping sprees,” Mierzwinski says. It could be the result of getting laid off or falling sick, for example.
Authorized user status also can help people who have no credit and are trying to build a credit foundation. Detweiler says, “I added my daughter as an authorized user to one of my credit cards when she turned 16 and started driving. She’s now in college and has an excellent credit score.”
In addition, giving an authorized user access to your account can enhance your own credit history if the account would otherwise go unused and be at risk of closing for inactivity. An authorized user who makes charges and pays them off can keep your account alive, and you both get the benefit of positive payment activity.
Sometimes, adding an authorized user is simply a matter of convenience, says James Philpot, associate professor of finance and director of the financial planning program at Missouri State University.
For example, a husband and wife might add each other as authorized users so each can easily use the other’s account. Or a trusted employee might get an authorized user card on a small business card account to make purchases on behalf of the business.
Cons of Adding an Authorized User
However, before you add an authorized user to your credit card account, understand the substantial risks. You could:
— Bear ultimate responsibility for charges made with the card
— Risk exceeding a responsible credit utilization ratio
— Strain personal relationships if it doesn’t go well
Philpot says cardholders who want to help a friend or loved one sometimes use poor judgment when adding an authorized user to their account. Giving a credit card to someone who would otherwise not qualify for one can be a hazardous choice.
For starters, you remain the primary account holder. The authorized user is only a secondary account holder. That means ultimate responsibility for making sure your credit card bills are paid rests with you. Typically, the authorized user will not even receive a monthly statement from the credit card company.
When you add an authorized user to your account, you are essentially asking that person to promise to handle credit responsibly, Mierzwinski says. “If they renege on that promise, it can be difficult,” he says. “Because you get the bad credit on your credit report.”
Authorized users can hurt your credit in two primary ways, Mierzwinski says: They can add a lot of debt to your credit account, pushing you closer to your credit limit, and they may not actually pay for charges they’ve made.
Approaching your credit limit can cause your credit score to slip. “As long as you’re paying your cards on time and staying below 30 percent of your limits, that’s good,” Mierzwinski says. “But if you go up toward getting maxed out, that’s bad.”
And if the authorized user racks up a lot of debt and struggles to pay his or her portion of the credit card bill, you, as the primary cardholder, will need to cover the payment. If you can’t, it can damage your credit.
“If you’ve got negative items — 30, 60 or 90 days late, or delinquencies worse than that — then the cardholder is hurt,” Mierzwinski says.
All these issues can put a strain on your relationship with the authorized user. “It could all blow up if the two (cardholders) end up having a disagreement,” Mierzwinski says. “You’ve got to be pretty confident that you’re taking the right step.”
Tips for Adding an Authorized User
— Don’t offer cards to anyone you can’t trust.
— Set limits.
— Monitor your account.
— Remove authorized users who aren’t working out.
You’re responsible for purchases made on your credit card account whether they’re yours or not.
If you want to help an authorized user build credit, you don’t have to actually give that person a credit card. But if you do, stay vigilant, Detweiler says. She suggests setting up alerts that inform you of all the authorized user’s spending.
[Read: Best Balance Transfer Credit Cards.]
Mierzwinski says people who add authorized users also have to make sure all spending on the account remains well below the account’s credit limit. Fail to do this, and “your credit score could decline unless you raise your limit,” he says.
If you’re concerned about an authorized user spending too much, ask your issuer if it will limit the amount the user can charge on the card.
As primary account holder, you can remove the authorized user from your account at any time. Typically, you’ll call your credit card issuer’s customer service department and make the request. If the authorized user has your current credit card number, you should request a replacement card for yourself as well.
Once the authorized user is removed, he or she no longer can spend on your account. However, any charges the authorized user made remain your responsibility. And abruptly cutting an authorized user from your account may strain your relationship, so try to work through issues first.
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The Pros and Cons of Adding an Authorized User to Your Credit Card originally appeared on usnews.com