Feeling generous and want to help out someone with no credit? It’s possible to add an authorized user to your credit card, but you should recognize the risks before you take them on.
Katie Bossler, quality assurance specialist at financial nonprofit GreenPath, says that adding an authorized user is favorable because building credit takes time. According to Experian, a person needs “to have an open and active account for three to six months before a credit score can be calculated.” Getting a high score takes even longer.
When a person becomes an authorized user on an account, it’s a shortcut. Authorized users not only get purchasing power but are also shared on payment history, utilization rate and age — all of which can influence their credit score. They don’t have to start from scratch; they can skip the line.
“For anyone who’s new to credit, understanding how to responsibly use a card is such a great thing, and this can be a good opportunity to help that person along,” Bossler says.
This is beneficial for young people, who may not have credit cards, a car loan or really much money at all to speak of. But there are some pretty serious risks involved.
For the authorized user, it could go south if the account holder starts financially flaking. If they randomly begin missing payments or carrying a huge balance, it could end up hurting the user’s score.
The situation may turn sour if the user goes wild and buys a bunch of expensive items on the account holder’s card, too. It’s not a joint account; you don’t share the burden. The debt belongs to the account holder even if the transaction doesn’t.
“He’s not left holding the bill,” Bossler says. “He’s not responsible for paying it back.”
The No. 1 factor in a credit score is on-time payments, but another potentially hairy area is the utilization rate. Cardholders are generally advised to keep their credit utilization ratio, which measures credit used in relation to credit available, under 30%.
American Consumer Credit Counseling’s Madison Block points out that, based solely on the numbers, it’s easier for two people to spend more than one. She gave an example: Say your credit limit is $1,000, so you want to put no more than $300 on your card. You’ve been comfortable with that budget all this time, but then you add a user. If you continue spending at your normal level and then the user also spends $300, the utilization rate is going to spike. And that means your credit score is likely going to fall.
“You have to agree ahead of time with that authorized user, that ‘Hey, each of us can only spend $150 a month,’” Block says.
That sort of agreement plays into another consideration around authorized users. You should only add people you wholly trust to your account.
Bossler recommends having a sit-down with a sibling/relative/friend before putting them on my card. You should hammer out some ground rules about how much they’re allowed to buy, how they’re going to pay you back and what you’ll do if you end up carrying a balance. From there, proceed with caution.
“We’re blending family and money,” she says. “If things don’t go well, it can be a strain on the relationship.”
The bottom line: Adding an authorized user on your card can give someone an advantage, but you should be careful. You’ll need to trust them to not run up debt, and they’ll need to trust you to make payments on time.
You’re ultimately responsible for what happens, though there are ways to keep tabs on the authorized user. For example, you can pull your credit report (right now you can get one a week for free) and set up text alerts for any spending that happens on the account.
There is a failsafe, too: If it doesn’t work out, you can always remove the authorized user.
“You remain in control,” Bossler says. “You can add them on but also take them off.”