Whether you’re looking to lengthen your credit history or increase your credit score, becoming an authorized user can help establish better personal credit. And anyone with a credit card may have an authorized user added to the account, making it an easy process.
However, there are a lot of responsibilities that come with being an authorized user and they should not be taken lightly. If you’ve been asked to become one or you want to become one on someone else’s credit account, it’s helpful to know the exact impact it could have on your credit score.
Definition of an Authorized User
An authorized user is someone who has access to an account but is not an actual owner on the account. You may be added as an authorized user on a credit card, checking account, or other financial accounts. You have access to the money or the credit but isn’t liable for any payments.
If you add someone to one of your accounts, your creditor may allow you to limit the user and how much of the money he or she has access to.
Other accounts may give them equal access to your funds. In either case, the primary account holder receives the bill and is required to make the payments regardless of who used the account.
Why Become an Authorized User
There are two basic reasons you might become an authorized user on someone else’s account. The first reason is to gain access if the other person should need them to take over or obtain funds for some reason.
An example of this is when adult children are added to their parents’ financial accounts. If the parent becomes unable to use the account, either obtaining the funds or paying the bill, the adult child who is on the account is able to manage the account on their parent’s behalf.
Adding Your Teenager
The student may even be the owner of the account with the parents added as authorized users. This allows parents to add money as well as debit the account.
The second reason people become authorized users is to build credit. In the example where parents add their young adult child as a user on their credit card account, this account will show up on the child’s credit report.
For someone just starting out with no credit history, this may be enough to help them create a history. While it won’t enable them to receive an excellent credit score, it’s a starting point because the card shows up from the original date it was opened with the parent, not when the child was added.
How It Can Benefit Your Credit Score
If you have no credit history at all or even a poor history, being added as an authorized user can help you build some positive information. The account will be listed on your report, showing on-time payments and a history of whatever time the account has been opened.
Any positive information helps to improve your score even if you’re only an authorized user. It also encourages other creditors to offer you a credit card. You may be able to get approved for your own card that you wouldn’t otherwise have access to.
This would enable you to continue building credit on your own. Just remember to always use credit cards responsibly, and never charge up more than you can afford to pay off.
How It Can Hurt Your Credit Score
Just as your credit score is affected by the primary user’s positive history, it’s also affected by any negative activity. For instance, if the primary account holder fails to make a payment, maxes out their credit limit, or otherwise engages in negative behavior, you will feel it in your credit score.
While it will most likely hurt them more than you, it still damages your credit rating. If you’re trying to build or rebuild credit, you could potentially end up doing more harm than good.
Similarly, your actions in using the credit card also impact the account holder. If you charge a bunch of stuff to the account, they are ultimately the one responsible for paying the balance.
You may not even be aware of the balance or the impact of your spending spree because the statement goes to the primary account holder rather than you as the authorized user.
Adding an Authorized User to an Account
Anyone can become an authorized user as long as the primary account holder approves it and submits a request to the creditor. However, the credit bureaus can often tell when someone has been added just to improve their score rather than for legitimate reasons.
For example, a red flag is raised if you’ve been added to multiple accounts, particularly over a short period of time. Beware of trying to game the system; it could backfire.
You also want to consider the person adding you to their account. What they do has an impact on your credit and it could strain your relationship as well. You want to know for sure that they make their payments on time and they’re responsible enough not to do anything that causes damage to their score or your own.
Authorized Users vs. Joint Accounts
There are responsibilities and privileges for both. As an authorized user, you are allowed to use someone’s account.
As a joint account holder, you are equally responsible for the account as the other person. While this means you have more authority and abilities to make changes to the account, you are also held just as liable for payments.
Total Debt & Debt Utilization Ratios
One area where you can see the difference is in relation to total debt and debt ratios.
As an authorized user, the credit account doesn’t count against you when lenders calculate how much debt you owe in order to be approved for a loan. With a joint account, the payments and balance count against you and could reduce the amount you’re approved for.
Another way the two are different is in the approval process. As an authorized user, the creditor won’t do a credit check or even require an application in most instances.
The account holder just needs to give a name and social security information for the person to be added. For a joint account, the person has to go through the complete approval process. It’s like the person is applying completely on their own.
Removing an Authorized User
If becoming an authorized user helps your credit score by giving you a new account with positive information, you may wonder what will happen if you are removed. Not surprisingly, this action also impacts a person’s credit score, but just how much depends on several factors.
Once you’re removed as an authorized user, the account will be cleared off your credit report. This will most likely result in a negative impact, but the result depends on other information on the report. The two areas it will bear the most impact are the length of credit history and debt utilization. Let’s take a look at some examples.
If you were added to an account as an authorized user several years ago and you just recently got your own first credit card, expect your credit history to drop by quite a bit. But overall, length of credit history only plays a small role in your credit score, so the change might not be dramatic if your other areas are strong.
A bigger impact is felt based on your debt utilization. If you have other credit cards and they are all maxed out, your debt utilization rises if the card didn’t carry a large balance. Creditors look at your total available credit against your balances to see how much you utilize your credit.
For example, say you have two credit cards with a credit limit of $1,000 each. You are an authorized user on another credit card with a limit of $1,000. Your two cards are completely maxed out but the other one has a zero balance.
Right now, you are using two-thirds or about 66% of your credit. Take away that card where you’re an authorized user and your utilization goes up to 100%. And your credit score takes a hit because credit utilization accounts for about a third of your credit rating.
What to Consider When Becoming an Authorized User
You should first consider your reasons for being an authorized user. If your goal is to build credit, you should work towards building your own credit and only use this as a stepping stone. Make sure you handle your own credit and that of the primary account holder responsibly.
Look at the account as temporary assistance rather than counting on it for the long term. It will have less of a negative impact when you’re removed if you have built up your own credit profile.
Make sure you know the person well and trust them before being added to their account. Set ground rules about your role. Are you responsible for making payments or will you be expected to pay off the balance as it comes due? Both of you should be on the same page as to how you will handle credit.
Becoming an authorized user on an account is one way to help a person begin to build their credit history. However, it is not without some risks and challenges. Be prepared to deal with these so that you can reap the benefits.