If a loved one needs to build credit, he might ask you to add him to your credit account as an authorized user. An authorized user is an individual who can use a credit card, but doesn’t have to make payments on that account and can’t make account changes. In turn, your timely payments are reported to the credit bureaus on his behalf, allowing him to improve his credit without having his own account.
Adding an authorized user is less risky than cosigning and is often a great option when you want to help a family member or friend build a great credit score. But not so fast. Before you add an authorized user to your credit card, you should discuss these four questions.
1. Who’s going to pay the authorized user’s charges?
From a legal standpoint, the authorized user isn’t obligated to make payments. However, you should discuss personal payment expectations with your potential authorized user before adding him to your card. Will he pay you monthly to cover his portion of the card charges? Or will you be paying for his charges in full? Discuss this ahead of time to avoid this uncomfortable question: So, um, where’s my money?
2. If you’re paying, is there a spending limit?
If you’re covering the authorized user’s charges, you’ll likely want to set a monthly spending limit. For instance, if your college kid is on your account, you could agree on a reasonable amount for him to spend on food, transportation and entertainment.
Set this amount based on a) a realistic amount for your authorized user to spend monthly on his needs and wants, and b) what you’re willing and able to pay off in full before the due date. Don’t set an amount you can’t reasonably pay off each month because you’ll unnecessarily incur expensive interest charges.
3. Why does the authorized user need to be added to your card?
You’re probably adding an authorized user to improve his credit, but why is he in this position? You might be adding your college-aged kid who needs to build credit for the first time. Adding him is probably a good idea. However, if it’s someone who abused credit in the past, you may want to consider whether or not this is the best idea.
Everyone makes mistakes. Ideally, the mistake is a lesson learned that can be avoided in the future. If this person has bungled credit in the past, but has shown better financial judgment more recently, he may be a good person to help out. But if his credit is bad and he continues to make poor decisions, adding him to your account could spell disaster.
4. What is the exit plan?
Unless you’re adding your spouse as an authorized user for practical joint financial reasons, you’ll probably want to cut your authorized user free at some point. Whether this exit plan is a specific date (like six months or a year) or a credit goal (like a score over 700) make sure the exit plan is defined and understood by you and the authorized user. You can remove the authorized user from your account at any time, but having this discussion ahead of time will likely make this credit card relationship more successful and less likely to cause friction.
Bottom line: Adding an authorized user is a big decision that could leave you stuck with a large bill. Before adding someone to your credit card account, you should discuss payment responsibilities, spending limits and an exit plan. Also, consider why the authorized user needs to be added to your account in the first place to decide whether or not it’s a good move based on his financial habits.
Couple with credit card image via Shutterstock.