By Sharita M. Humphrey, CFEI
There are advantages to adding an authorized user to your credit card. That someone might be a loved one, your child, or a member of your family. For one thing, adding them will help improve or establish their own credit. The authorized person will have your card with their name on it. And they can make purchases under their name, but that doesn’t mean they are co-signers of your account.
It is a thoughtful gesture. And while it may be a great way to help the authorized user, there are instances where it can be risky for you as the account holder.
With that being said, is it the right thing for you to do? To help you decide, here are a few things to consider before adding an authorized user to your credit account.
If an authorized user misses a payment, you will be held responsible. As the primary user, you are still the owner of the account. And all purchases made are your responsibility. Authorized users don’t have that much to lose, but you do. As the primary owner, you will be receiving a credit card statement and paying for the account bills. So make sure to discuss responsible spending with the authorized user.
On the bright side, some companies do offer solutions to protect primary account owners. They may allow account owners to set spending limits on the authorized user’s credit. In this way, you can control the potential expenses of your authorized user so they don’t exceed the amount you’d be willing to pay if they don’t hold up their end of the bargain.
If you have a positive account record, it can help your authorized user build their score. However, if the person you’ve added has negative credit habits like late payments or consistently large balances, your credit could also take a hit.
By spending excessively, the authorized user can quickly cause your card to hit its limit. And if they don’t pay their portion on time, you could be stuck with a hefty payment, or worse, a late payment. Carrying a large balance and making late payments will hit your credit score hard.
Avoid this pitfall by educating the authorized user about spending wisely so that they will understand how this will affect both of your scores.
Although it depends on the credit card issuer, the authorized user could access your information. Some companies allow authorized users to request account information, copies of the billing statement, and how much you owe on the card. They will also be able to see how you're spending your credit, along with when and where you made your purchases.
Of course, this also applies to you as the primary owner. You will be able to see and know the transactions and spending habits of your authorized user.
The card utilization ratio is the percentage of credit used compared to your credit card limit. And if two or more people are using your account, your ratio might increase. All of us have different spending habits and you can’t control how much the other person might spend. A high rate on the card utilization ratio can negatively affect your account. A rate of 30% and beyond can negatively harm your credit.
To avoid this, you can set up alerts on your account so that you can receive a notification when a purchase is made. Another option is to set spending limits. Not to mention, there are alerts to inform you if any suspicious activity is detected on your account.
If you run into some issues with the authorized user, there’s a possibility your relationship with this person will be negatively affected. You have to make sure that the authorized person is trustworthy. Be smart or you’ll end up paying for someone else’s debt. So be sure to talk with your prospective authorized person before you add them.
As the primary user, you have the power to remove them if they act irresponsibly. While this might lead to negative feelings, be prepared to remove them, if you must.
Before adding someone as an authorized user, make sure to think about the pros and cons. Is this beneficial for you? Consider all the things that might be impacted if you decide to add an authorized user to your account.
Things to discuss with your prospective authorized user:
Managing your credit and finances is not something that will just happen overnight. So give yourself plenty of time to think about adding someone as an authorized user before you make a decision that can impact your financial future.
Sharita Humphrey is an award-winning finance expert and money mentor. Once broke and homeless, Sharita knows first-hand that financial freedom has a blueprint. As a former state government auditor and tax representative, Sharita left the security of a government job to pursue her dream of helping individuals change the financial trajectories of their lives and businesses.
As a certified financial educator, Sharita helps entrepreneurs learn the basics and intricacies of creating, managing, and growing their businesses. Sharita was named the 2020 National Financial Educator of the Year for her work within her local community and across the country. Sharita recently expanded her educational services internationally, collaborating with the U.S. Embassy in Namibia to educate entrepreneurs in Africa.
Sharita is a media maven, providing regular editorial contributions to entrepreneurial publications and organizations including the blog for America’s Small Business Development Centers. She has been featured in top-tier media including CNBC, iHeartMedia, Forbes, Yahoo! Finance, and BBC World News.