Is adding another person, or "authorized user," to your credit card account a smart financial move? There are advantages and pitfalls – and not necessarily a right answer for every person faced with such a decision.
On one hand, it can help a young person or someone lacking credit to begin building a good credit profile. On the other hand, there's a chance the authorized user will not be as responsible as you'd like, and can ruin your personal credit profile.
Understanding how credit card issuers handle authorized user accounts can address these concerns. With the proper steps, you can protect your credit profile while also helping others improve their credit.
What shows up on an authorized user's credit report?
Many consumers know that adding another user will help build credit, but they don't know how it will appear on an authorized user's credit report.
Normally, a credit card company will report the total credit limit of the account on the authorized user's credit reports. However, these are not individual credit limits – they are shared between the primary cardholder and all authorized users – and the account balance is reported the same way for everyone on the account.
For example, if there is a $5,000 balance on an account with a $10,000 credit limit, this is what will show up on the credit reports for you and secondary users, regardless of who contributed to that balance.
Therefore, any late payments or defaults recorded on the credit card account will be reported for everyone and have a negative impact on their credit scores.
How spending limits make a big difference.
Many credit card issuers allow primary cardholders to establish spending limits on each authorized user account. Taking the time to set such spending limits will go a long way to safeguarding your pristine credit history from being tarnished by an authorized user.
For example, if you put a $1,000 spending limit on an authorized user, his or her card can only charge up to that amount, even if the total credit limit on the account is $10,000. But the way the account balance is reported to credit bureaus will not change. It's possible a balance greater than the spending limit will be recorded on an authorized user's credit report.
In the event the primary cardholder racks up a high balance, the credit profile of authorized users will suffer as well because the credit limit is shared. So if your balance is $9,500 on a credit line of $10,000, the other user won't be able to spend more than $500, even if you set a spending limit of $1,000 for him or her.
With the ability to set spending limits, primary cardholders may be more comfortable with adding an authorized user. If anything, authorized users may be worried that primary cardholders will overspend and thereby reduce their limit.
The effects of closing an authorized user account.
After the credit profile of an authorized user is capable of standing on its own, it may be time to consider closing the authorized user account.
When the closure occurs, the account will be marked "paid as agreed," and no further data will be reported to credit bureaus. Note, however, that some banks may completely wipe out the account. In this case, it would be wise for authorized users to open their own credit card account before closing their authorized user account.
Unfortunately, the former authorized user will experience a dip in his or her credit scores because they've lost access to that old credit line, which is factored into the credit score formula.
Simon Zhen is a columnist and staff writer for MyBankTracker.com, where he covers banking, financial technology and savings rates.