Episode 188: September 7, 2010
Debt Loans Credit
by Laura Adams
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Whether you should co-sign for a credit card with another person is an important decision. In this article, we'll explore what it means to be a joint credit card account owner versus having an authorized user. After considering the pros and cons of both options, you'll know which credit card setup is best for your situation.
Should You Have a Joint Credit Card?
When you apply or co-sign for a credit card with someone else, such as a spouse, a relative, or a friend, you become joint account owners. You each receive a card in your own names and share the responsibility for making monthly payments. But what many people don't realize is that joint credit card owners are each one hundred percent responsible for all the debt that accumulates on the card.
Cons of a Joint Credit Card Account
The financial risk that comes with sharing liability for a credit card is something no one should take lightly. Transactions on a joint account are reported on both of your credit reports and therefore affect both of your credit scores. Let's say you co-sign for a credit card with your boyfriend and he goes on a spending spree and charges thousands of dollars worth of surfboards, bikes, and fly rods. Even if you're in the dark about those toys or never use them, if your name is on the account and you break up, guess what? Yup, you'll be expected to pay for all of his credit card charges if he mysteriously disappears. If you don't make payments on a credit card account that's in your name, it'll be a huge black mark on your credit report and you'll see your credit score plummet. Talk about a bad romance.
Pros of a Joint Credit Card Account
However, there are benefits to having a joint credit card if you have poor credit and can't get approved for your own credit card. If someone with stellar credit is willing to co-sign an account with you, you'll probably ride their credit-worthy coat tails and get the card. When you both use the card responsibly—by never overspending and always making payments on time each month—both of your credit scores can increase. This is a great strategy to start building credit if you're under 21 or are just starting out on your own. A parent can co-sign for a card with their child, for instance. But as I mentioned, when either party abuses a joint credit card, it negatively affects both account owners.
What is an Authorized Credit Card User?
Another way to share a card without sharing in the liability is to add one or multiple people to your account as an authorized user. Being an authorized user allows them to have a card in their name, with no legal responsibility for the debt. When you're the primary cardholder you're the only person who's responsible for the debt and for making monthly payments.
Why on earth would you want to add someone as an authorized user when you don't feel comfortable sharing a joint credit card account? I'll explain more in a bit, but the quick and dirty answer is that this is a common arrangement for parents and their children.
Cons of Having an Authorized Credit Card User
Here are three potentially dangerous issues to consider before adding an authorized user to your credit card:
Since an authorized user can use your credit card without any liability for the debt, he or she could spend like there's no tomorrow and leave you with a massive bill.
If an authorized user maxes out your credit limit, that could negatively affect your credit and cause your credit score to decrease.
An authorized user might not be careful to protect your identity. For instance, they could share your credit card account number too freely or use it on dubious Web sites.
Why Would You Want an Authorized Credit Card User?
Even though having an authorized user on your credit card comes with risks, as the primary cardholder you're in complete control of the account. A nifty feature of most credit cards is that you can assign a credit limit for an authorized user that's less than your own. For instance, if you have a $5,000 credit limit, you could add your college-bound daughter as an authorized user with a $500 credit limit. That's a great way to limit your liability and you can raise or lower the credit limit for an authorized user as you see fit. If they don't follow your rules for using the card you can simply drop them from the account at any time.
Having an authorized user on your credit card is a great way to give someone access to your credit line for emergency purchases. It also allows you to teach someone, like a child, about how to use a credit card responsibly. You'll be able to see when, where, and how much they spend on the monthly statement or by viewing the transactions online. If the card is managed responsibly, you may be able to help him or her establish a good credit history.
Can Authorized Users Build Credit?
Some credit card companies report transactions to the credit bureaus for both the primary cardholder and authorized users.
However, being an authorized user doesn't always give you the opportunity to build up your credit. It depends on these factors:
Whether the credit card company reports account information to the credit bureaus in the name of authorized users;
Whether the credit scoring model factors in payment history for authorized users; and
Whether the primary cardholder has a good payment history.
Here's the deal: Some credit card companies report transactions to the credit bureaus for both the primary cardholder and authorized users. That might be great if the primary cardholder is financially responsible because their good payment history would help an authorized user build credit. But if the primary makes late payments or defaults on the debt, that could destroy the credit of an authorized user.
To make this issue even more complex, there are different credit scoring models and some don't count information for authorized users in calculating their credit score. For instance, if you're an authorized user and the primary cardholder has a bad payment history, that negative information could show up on your credit report but might not even be included in the formula that calculates your credit score. Some credit scoring models simply ignore the information that appears on accounts where the cardholder is just an authorized user and not the primary card owner.
Therefore, in some cases, neither the good nor the bad behavior of a primary cardholder would raise or lower the credit score of an authorized user. You can't control what happens with credit scoring models, but you can choose a credit card that reports payment history for authorized users, if building credit is your goal.
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