Adding an authorized user to your credit card can be a strategic move for both the primary cardholder and the person being added. It’s a way to help someone build credit, manage household spending, or simply share the convenience of a credit card. However, understanding the responsibilities, benefits, and potential risks involved is crucial before taking the plunge. Let’s dive into the world of authorized user status and explore what it means for everyone involved.

What is an Authorized User?

Defining Authorized User Status

An authorized user is someone who is allowed to make purchases on a credit card account owned by another person (the primary cardholder). They receive their own credit card, linked to the primary account, but are not legally responsible for paying the bill. Think of it as a “credit card guest” – they get to enjoy some of the benefits, but the primary cardholder holds the ultimate responsibility.

Primary Cardholder vs. Authorized User: Key Differences

It’s essential to understand the distinction between the primary cardholder and the authorized user:

• Primary Cardholder: The owner of the account. Responsible for all debts incurred on the card, including those made by authorized users. Controls the account and can add or remove authorized users at any time. Directly impacts their credit score based on account activity.
• Authorized User: Can make purchases using the credit card. Not legally obligated to pay the bill. Account activity may or may not affect their credit score (depending on the credit card issuer’s reporting policies). Has no control over the account and can be removed at any time by the primary cardholder.

How to Become an Authorized User

Becoming an authorized user is typically a straightforward process. The primary cardholder initiates the request with the credit card issuer. This usually involves providing the authorized user’s name, date of birth, and address. Some issuers may require the authorized user’s Social Security number, but it’s not always necessary. Once the information is submitted and approved, the credit card issuer will send a card to the authorized user.

Example: John wants to help his daughter, Emily, build credit. He adds her as an authorized user to his existing credit card. He provides Emily’s name and address to the credit card company, and they send her a card with her name on it. Emily can now use the card to make purchases, and those purchases will be reflected on John’s statement.

Benefits of Adding an Authorized User

Credit Building Potential

One of the most significant benefits for authorized users, especially those with limited or no credit history, is the potential to build credit. Many credit card issuers report the account activity of authorized users to the major credit bureaus (Experian, Equifax, and TransUnion). If the primary cardholder uses the card responsibly and makes payments on time, the authorized user’s credit report can reflect positive credit history. However, it’s crucial to confirm that the card issuer reports authorized user activity to the credit bureaus before adding someone.

Example: Emily, mentioned earlier, had a limited credit history. After being added as an authorized user to her father’s credit card and he paid his bills on time, her credit score began to improve. This helped her qualify for a car loan later on.

Convenience and Shared Spending

Adding an authorized user can simplify household finances and allow for shared spending. For instance, parents can add their children (even if they’re adults) to help them with emergencies or manage expenses while away at college. Spouses can easily track joint spending through a single credit card statement.

Rewards and Perks

Authorized users often get to enjoy the benefits of the credit card rewards program. They can earn points, miles, or cashback on their purchases, which the primary cardholder can then redeem. This can be a win-win situation, as the authorized user gets to enjoy the convenience of the card, and the primary cardholder benefits from the additional rewards earned.

Easier Expense Tracking

For businesses, adding employees as authorized users can streamline expense tracking. Instead of providing cash advances or reimbursements, businesses can issue credit cards to employees and monitor their spending through the credit card statement. This provides a clear audit trail and simplifies accounting processes.

Risks and Responsibilities

Primary Cardholder’s Responsibility

The primary cardholder is ultimately responsible for all charges made on the credit card, including those made by authorized users. This means that if an authorized user overspends or fails to use the card responsibly, the primary cardholder’s credit score can be negatively affected. Therefore, it’s crucial to carefully consider who you add as an authorized user and establish clear spending limits and expectations.

Potential for Overspending

Without proper communication and boundaries, authorized users might overspend, leading to increased debt for the primary cardholder. It’s vital to discuss responsible credit card usage and set spending limits to avoid financial strain.

Credit Score Impact on Primary Cardholder

As the primary cardholder is responsible for the account, their credit score is directly impacted by the way the authorized user uses the card. Late payments, high credit utilization, or other negative actions by the authorized user can lower the primary cardholder’s credit score.

Data Security Risks

Whenever a new credit card is issued, there’s a potential for data security risks. The primary cardholder should educate the authorized user about phishing scams, card skimming, and other forms of credit card fraud. They should also emphasize the importance of protecting the card number and PIN.

Alternatives to Authorized User Status

Secured Credit Cards

For individuals with poor or no credit history, a secured credit card can be a good alternative to becoming an authorized user. A secured credit card requires a cash deposit that acts as collateral. The credit limit is typically equal to the deposit amount. By using the card responsibly and making timely payments, individuals can gradually build their credit.

Credit-Builder Loans

Credit-builder loans are specifically designed to help people build credit. These loans are typically small, short-term loans that are secured by a savings account. The borrower makes monthly payments, and the lender reports the payments to the credit bureaus. Once the loan is paid off, the borrower gains access to the funds in the savings account.

Student Credit Cards

Student credit cards are designed for college students with limited credit history. These cards often have lower credit limits and may offer rewards programs tailored to student needs. They can be a good option for students who want to build credit while managing their expenses.

Co-Signing a Loan

Another option is to co-sign a loan for the individual. While not directly related to credit cards, it allows them to build credit through installment loan payments. However, the co-signer is fully responsible for the loan if the primary borrower defaults, so this should be approached with caution.

Removing an Authorized User

Reasons for Removal

There are several reasons why a primary cardholder might want to remove an authorized user:

• Overspending: The authorized user is consistently overspending or exceeding agreed-upon limits.
• Irresponsible Use: The authorized user is making late payments or engaging in other behaviors that negatively impact the credit score.
• Changed Circumstances: The relationship between the primary cardholder and the authorized user has changed (e.g., divorce, separation).
• Simply No Longer Needed: The authorized user has established their own credit and no longer needs the card.

The Removal Process

Removing an authorized user is usually a simple process. The primary cardholder needs to contact the credit card issuer and request the removal. This can typically be done online, over the phone, or in writing. The credit card issuer will then deactivate the authorized user’s card. It’s also a good idea for the primary cardholder to destroy the authorized user’s card to prevent any further use.

Credit Score Implications After Removal

The impact on the authorized user’s credit score after removal can vary. If the account was in good standing (payments made on time, low credit utilization), the removal might have a neutral or slightly negative impact, as they lose the positive credit history associated with that account. However, if the account had negative marks (late payments, high credit utilization), the removal could be beneficial, as it removes those negative items from their credit report (though they will still show on the primary card holder’s report).

It’s also crucial for the primary cardholder to review their credit report after removing an authorized user to ensure that the removal was processed correctly and that there are no unauthorized charges.

Conclusion

Adding an authorized user to your credit card can be a beneficial strategy for both parties involved, offering opportunities to build credit, share rewards, and streamline expenses. However, it’s essential to carefully weigh the risks and responsibilities before making a decision. Clear communication, established spending limits, and a thorough understanding of the terms and conditions are crucial for a successful authorized user relationship. If you’re considering this option, remember to prioritize responsible credit card usage and protect your financial well-being.