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In 2020, there were more than half-a-million bankruptcy filings in the U.S. And while you may not be concerned about declaring bankruptcy yourself, there’s the possibility that an authorized user or joint account holder on your credit card could file.
It’s important you know the difference between these two types of shared account users and how they could affect your credit in case of bankruptcy.
What is an authorized user? A joint account holder?
An authorized user is someone who is able to use your credit card but can’t make changes to the account and isn’t financially obligated to make payments. Credit card issuers send the authorized user’s card to the primary account holder, so he or she can give it to the authorized user at will.
A joint account holder is someone who shares total responsibility with you on the credit card account. This person can make changes to the account and is obligated to pay the bill if you don’t.
What happens if I add an authorized user who previously declared bankruptcy?
It won’t affect your credit in any way if your potential authorized user has declared bankruptcy, according to Experian. As you don’t share a report with the user, his or her past actions have no bearing on your finances.
It may be a good idea to understand why he or she declared bankruptcy. Medical debt is the biggest reason for bankruptcy, and this often can't be helped. However, if your potential authorized user declared bankruptcy after racking up a large amount of credit card debt, it’s a good idea to consider whether you trust his or her judgment when it comes to spending. You’ll be liable for any charges made on your credit account.
What happens if my current authorized user or joint cardholder goes bankrupt?
Because your authorized user isn’t financially responsible for charges to the account, your credit report won’t be damaged if he or she declares bankruptcy. However, if your joint account holder files, the credit account would be included in the bankruptcy proceedings.
It’s usually a good idea to keep credit card accounts separate (or just add someone as an authorized user), but if you have a joint account and your joint cardholder decides to declare bankruptcy, you have a couple of options. Do one of these two things before your joint account holder files:
Call your issuer. We’d recommend starting with this. Call your credit card issuer and ask if your joint account holder can be removed from the credit card agreement. Some issuers will approve this request, and you’ll be able to keep your account and keep your credit intact.
Close the account. Provided you don’t have a balance on the joint account, you can simply close it. While closing accounts can hurt your credit score a little, it won’t damage your score to the extent a bankruptcy would.
It’s generally not advisable to keep joint accounts with anyone, especially if he or she is at risk to declare bankruptcy. If you do choose to share an account with someone, add him or her as an authorized user. You will be responsible for all expenses incurred on the account, but in case of bankruptcy your credit score will remain unscathed.