Did you know that many credit card companies will allow more than one person to use the card for purchases? There are two primary ways this is done: via joint credit cards, and when a primary cardholder allows another person to use the card, which is called an authorized user.
The difference seems subtle, but in fact, it is very important. With a joint credit card, both parties are responsible for the charges. Only the primary cardholder is responsible for the charges with an authorized user, even though someone else may make purchases with the card.
This sounds like a bad situation to be in, and it can be when it is abused. But it can also serve a purpose and is a common situation for parents who want to give their teen access to a credit card.
Let’s take a look at how this works and the pros and cons of having an authorized user on your credit card.
What is the Effect of Having an Authorized User on Your Credit Card?
One way to get a credit card is to become the primary cardholder or to co-sign for a card with someone else. As the sole cardholder or joint account owner, you get a card in your name, are 100% responsible for the debt, and have all the account transactions reported on your credit file.
Another way to get access to a credit card is to become an authorized user on someone else’s card. Being an authorized user means you can get a card in your name, but have no legal liability for the debt—only the primary cardholder is responsible for making monthly payments.
How an authorized user affects the primary card holder
The immediate concern for most primary cardholders is how allowing an authorized user might affect their credit score.
The good news is the authorized user’s credit report, credit score, payment history, debt, and other factors will not affect the primary card holder’s credit score and history. The authorized users’ credit history doesn’t show up on the primary card holder’s history at all.
That said, all charges made by either user are the legal responsibility of the primary credit card holder.
How being an authorized user affects the authorized user’s credit
The authorized user may experience a boost in his or her credit score based on the primary card holder’s on-time payments and length of credit history. On the other hand, it can also cause an authorized user’s credit score to drop if the primary cardholder makes a payment late.
It is important to note that not all credit card companies report authorized users to the credit bureaus and not all credit bureaus count credit history from being an authorized user toward the authorized user’s credit score.
Can Authorized Users Build Credit?
There’s a lot of confusion about whether being an authorized user helps boost your credit. The reality is that it may or may not help—it depends on the following 3 factors:
Factor #1: What Information Credit Card Companies Report
Some credit card companies report account transactions to both the primary cardholder and the authorized user’s credit files. But some report them to the primary cardholder’s credit report only. That means you need to find out what a card company’s reporting policy is before you assume that being an authorized user will be a credit slam dunk.
Factor #2: What Information Scoring Models Use
Most people don’t realize that there isn’t just one credit score. A representative from Experian (one of the 3 major nationwide credit reporting agencies) told me that there are over a thousand different credit scoring models. Different companies—like mortgage lenders, insurers, auto lenders, and property management companies—use different credit scores to evaluate potential customers.
Not all credit scoring models count information that’s reported for authorized users. So, even if the primary cardholder has diligently made payments on time and that information is reported to an authorized user’s credit file, it may not be factored in some credit scores!
Factor #3: Payment History of the Primary Cardholder
If all the stars align and the card company reports information to your credit file and the credit scoring model takes authorized user transactions into account, you have to consider the value of the information. What I mean is whether the primary cardholder has been making on-time payments or not. If they’ve been irresponsible, that could damage your credit.
Negative Effects on an Authorized Users’ Credit Report
When the banks report information about a credit card, they will report to all three of the major credit bureaus for both the primary cardholder and the authorized user of the credit card. Experian will only include positive information on the authorized users’ credit reports for shared credit cards. Equifax and TransUnion will list both positive and negative notations on the shared credit card account on the authorized users’ credit reports.
FICO credit scores, the score most used by lenders when determining a borrower’s level of risk, is calculated using all the information on your credit report. This includes information reported on credit cards where you may only be an authorized user. So if the primary cardholder of that account is making payments late or not at all, your FICO score is going to decrease as a result of that activity.
Positive Effects on an Authorized Users’ Credit Report
One of the reasons many people become an authorized user on another person’s credit card is to help improve their credit score. For example, a college student might be added as an authorized user on their parents’ credit card.
Their credit score will then reflect the credit history of the card, which means it will appear the student has been making payments on a credit card for much longer than he or she really may have. Provided the parents have a good history of making payments on time, the college student will have a higher credit score than they would have without being an authorized user on their card.
Risks of Allowing an Authorized User on Your Account
The most important thing to remember regarding authorized users is this:
They have no legal responsibility for the charges they make on the primary credit card holder’s account, making this a risky proposition for the primary credit card holder. Allowing authorized users on your credit card account should only be done when you know and implicitly trust the authorized user.
The best example is allowing a teen to use a parent’s credit card as an authorized user. If you decide to allow an authorized user on your account, be sure to use this as an opportunity to teach them about how credit cards work and how their charges will affect their credit history and credit score.