Many people wonder how authorizing another person (usually a friend or relative) on their credit card will affect both parties' credit scores. Back in the day, becoming an authorized user on another person's credit card was a great way to build your credit. Even though being an authorized user is a great tool for building credit, a few things have changed in recent years. This article gets into the details of how you should use this credit-building tool to your advantage.
What does being an authorized user mean?
When you become an authorized user on another person's credit card account, you're issued a credit card in your name. You're able to use this credit card in the same way that the primary user does. However, you're not legally obligated to pay the debt. The primary user is responsible for paying the debt on the credit card. This also means that if you're an authorized user and use the credit card irresponsibly, the primary user is on the hook for it. There will be more details about this later. Generally, a person becomes an authorized user on another person's credit card rather than just getting a credit card in their own name because the person has poor credit and wouldn't get approval.
Being an authorized user to help build credit
Several years ago, it was a common credit repair practice to become an authorized user to rebuild your credit. However, the algorithm that generates your FICO score no longer factors this into the equation. In other words, it is still a good tool for establishing your credit if you don't have any credit history, but it won't help you rebuild your score if you have poor credit due to negative entries.
The best way to improve your credit score if you have poor credit is to get a secured credit card and remove negative entries from your credit report. You should also note that being an authorized user isn't going to have a huge impact on your credit score if you don't have any prior credit history, but it will help, so why not take advantage of it?
Again, becoming an authorized user is a tool for establishing good credit rather than rebuilding bad credit. There’s a big difference, and many people make the mistake of thinking that they will improve their bad credit by becoming an authorized user on their spouse's credit card. It simply won't impact your bad credit.
Sign up for a joint account instead
While creditors may look more closely at a credit score when opening a joint account, setting up one of these accounts can be a safe bet. Plus, both people will see positive credit score gains. And since it's a joint account, both people are responsible for the payment, and both names are on the account.
Adding an authorized user is risky
Those considering letting another person become an authorized user on their credit card should use great caution. There are countless instances where a family member became an authorized user, the family member ran up the credit card bill, and now the account owner is on the hook for a bill they can't afford. You have to realize that there's a real possibility that this will happen to you. It's not saying your family member will intentionally harm you financially, but this type of situation happens all the time, and you need to keep in mind the risk you’re taking by allowing somebody to use credit in your name.
That said, if you truly want to help out a young family member, perhaps your college-bound son or daughter, letting them become an authorized user on your credit card is a tool that will help them build some positive credit history.
Disclaimer: This story was originally published on June 11, 2017, on BetterCreditBlog.org. For more information on credit card authorized users please visit your own credit card company's clauses and terms.