Authorized Users: The Pros and Cons
If someone you know has bad credit and yours is good, you could make that person an authorized user on your credit card to boost his or her credit.
What does adding an authorized user to a credit card do? An authorized user can spend on your account -- if you give him or her a card -- and use your positive credit history to build credit.
"Typically, the entire account history will show up on the authorized user's credit report," says Gerri Detweiler, education director for Nav, which helps business owners monitor business and personal credit for free. "If the primary cardholder has a good payment history and low debt, that can be a tremendous benefit."
Adding an authorized user may have advantages for you as the cardholder, but do not take the decision lightly.
By law, authorized users are not responsible for their debts. The primary cardholder must pay if the authorized user fails to do so.
Make sure you know the pros and cons when you add an authorized user to your credit card.
[Read: Best Credit Cards for Bad Credit.]
What Does Adding an Authorized User to a Credit Card Do?
Adding an authorized user on your account allows you to:
-- Help boost the credit score of the authorized user.
-- Keep rarely used accounts active.
-- Share an account with a family member or an employee without much trouble.
Do authorized users also build credit? Yes. But the biggest pro of giving authorized user status: You can help someone climb out of a bad credit hole.
After all, it might not be your loved one's fault that he or she got into financial trouble, says Ed Mierzwinski, senior director of the federal consumer program at the U.S. Public Interest Research Group, or PIRG.
"A lot of times, bad credit is not the result of shopping sprees," Mierzwinski says. It could be the result of losing your job or your health, for example.
Becoming an authorized user is such an effective way to boost your credit score that the practice of "piggybacking credit" has emerged. In this arrangement, you pay someone with good credit to add you as an authorized user.
Authorized user status also can help people who have no credit and need to build a credit history. Some parents opt to give teens access to their credit cards as authorized users.
Detweiler says, "I added my daughter as an authorized user to one of my credit cards when she turned 16 and started driving. She's now in college and has an excellent credit score."
In addition, giving someone authorized user status can enhance your own credit history if an account would otherwise go unused and risk closure. An authorized user who makes charges and pays them off can keep your account open, and you both benefit from positive payment activity.
Sometimes, adding an authorized user is not about credit building and simply a matter of convenience, says James Philpot, associate professor of finance and director of the financial planning program at Missouri State University.
Spouses might add each other as authorized users on certain accounts. Or a trusted employee might get an authorized user card on a small business account to make purchases for a business.
[Read: Best Credit Cards for Fair Credit.]
Can an Authorized User Hurt Your Credit?
Before you add an authorized user to your credit card, know that it involves substantial risks. You could:
-- Bear ultimate responsibility for charges made with the card.
-- Risk exceeding an ideal credit utilization ratio.
-- Strain personal relationships if the arrangement doesn't go well.
Giving a credit card to someone who would otherwise not qualify for one can be hazardous. Cardholders who want to help friends or loved ones sometimes use poor judgment when adding an authorized user to an account, Philpot says.
For starters, you remain the primary account holder. The authorized user is only a secondary account holder. That means ultimate responsibility for making sure your credit card bills are paid rests with you.
Typically, the authorized user will not even receive a monthly statement from the credit card company.
When you add an authorized user to your account, you are essentially asking that person to promise to handle credit responsibly, Mierzwinski says. "If they renege on that promise, it can be difficult," he says, "because you get the bad credit on your credit report."
Authorized users can hurt your credit in two main ways, Mierzwinski adds: They can rack up a lot of debt, pushing you closer to your credit limit, and they may not pay for charges they've made.
Approaching your credit limit can cause your credit score to slip. In fact, the amount you owe on your credit card makes up 30% of your FICO score.
"As long as you're paying your cards on time and staying below 30% of your limits, that's good," Mierzwinski says. "But if you go up toward getting maxed out, that's bad."
And if the authorized user accumulates a lot of debt and struggles to pay his or her portion of the credit card bill, the primary cardholder will need to cover it. If you can't, you may damage your credit.
"If you've got negative items -- 30, 60 or 90 days late, or delinquencies worse than that -- then the cardholder is hurt," Mierzwinski says.
All of these issues can strain your relationship with the authorized user.
"It could all blow up if the two (cardholders) end up having a disagreement," Mierzwinski says. "You've got to be pretty confident that you're taking the right step."
What Are Tips for Adding an Authorized User?
If you've weighed the pros and cons and want to proceed, keep in mind these guidelines:
-- Don't offer cards to anyone you can't trust.
-- Set limits.
-- Monitor your account.
-- Remove authorized users who aren't working out.
If you want to help an authorized user build credit, you don't have to give that person a credit card.
But if you do, stay vigilant, Detweiler says. She suggests setting up alerts to track the authorized user's spending.
People who add authorized users also have to make sure all spending on the card remains well below the credit limit, Mierzwinski says. Fail to do this, and "your credit score could decline unless you raise your limit," he says.
Does adding an authorized user increase your credit limit? Not automatically. You might want to ask your credit card issuer to raise your limit to leave more room for you and the authorized user to spend.
But if you're concerned about an authorized user spending too much, check if your issuer can limit how much the user can charge on the card.
[Read: Best Balance Transfer Credit Cards.]
How Can You Remove an Authorized User?
As primary cardholder, you can remove the authorized user from your account anytime.
Typically, you'll call your credit card issuer's customer service department and make the request. If the authorized user has your credit card number, you should ask for a new card.
Once the authorized user is removed, he or she no longer can spend on your account. Still, any charges the authorized user made remain your responsibility.
And abruptly cutting an authorized user from your account can affect friendships or family relations, so try to work through issues first.
Does removing an authorized user hurt your credit? No, says Amy Thomann, head of consumer credit education at the credit bureau TransUnion.
"Removing an authorized user from a credit card won't impact your credit score if you're the primary user," she says.
But it may hurt the authorized user's credit score, Thomann adds. The effect will depend on the account history, whether the account will fall off your credit report and the other information in your credit file.
"If the account was in good standing, the deletion of the account from the authorized user's credit report could cause their credit score to drop," Thomann says.
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