NEVER Take on an Authorized User UNLESS You’ve Done These Things
If you’re adding an authorized user, there are four things you need to do before hand:
- Consider their financial history.
- Discuss limits.
- Set up an emergency plan.
- Enact smart financial habits.
However, this might not be as straightforward as it seems, especially if you’re not sure what an authorized user even is, or why you might want one. Let’s back up a second and cover the absolute basics.
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What is an Authorized User?
An authorized user, or an additional cardholder, is someone who can access your account without being on the hook for the bill. Instead of writing a check for this person, they have their own card attached to the account, so they can still pay for things with your money.
Why Would You Take On an Authorized User Anyway?
This seems crazy at first glance, but there are good reasons to take on an authorized user.
- Authorized users can build credit with little risk. If you’re trying to help someone get on their feet, like a child or another dependent, then this can be an easy way.
- Generate rewards from your credit card at a faster rate.
- Employers can make employees authorized users of business accounts, so that the paper trail is contained and simple. Instead of having to authorize every transaction, employers can free up a lot of their time by just taking on authorized users.
There are other reasons, but generally it is because you want to either help someone out, or ease frequent financial transactions between you and your authorized user.
Now that you understand the basics of authorized users, let’s go a little more in depth with the four things you need to do before taking one on yourself.
Consider Their Financial History
One of the biggest advantages for authorized users is that they can often build credit without having their own credit card. If they are unable to qualify for a credit card, or if you’re just not sure if your kid is ready for one yet, this might be the perfect way for them to start building credit when they have none.
However, if they do have a credit history, then you should use that to evaluate if this is a safe bet. Don’t just let someone with a low credit score have access to your account without really, really thinking about it first.
Unless you are a 100% confident that this person is more financially responsible than Scrooge himself, it’s a good idea to set some limits. You can do this in two different ways, although you might want to do both just to be safe.
First, you can simply decide on some limits between the two of you. Decide when the authorized user should access the account’s funds, how much they should use, and how any reimbursement agreement will work. Don’t just consider how much you trust this person to pay you back, but also your credit utilization ratio. You want to keep that lower rather than higher, and having an extra person dip into your credit line is an easy way for the ratio to become off-balance. You want to keep it under 30%, so keep that in mind when deciding on a limit. Write down the terms that you agree upon, because nothing gets misinterpreted like verbal agreements about money. This will save you a big headache later on.
Second, you can set hard limits with your lender. Some credit cards will let you set limits for authorized users so that they can’t access your entire credit line. This will make sure that, whether they follow your verbal agreement or not, the financial damage will be limited. You might end up having to cover the balance, but if you put a hard limit in place, the amount won’t be enough to wreck your credit or your bank account.
Set Up an Emergency Plan
Find out exactly how to remove someone as an authorized user before it ever becomes a problem. While some things are incredibly slow-moving in the finance world, debt has a way of snowballing. Consider that by the time you discover any debt that your authorized user has left on your card, you might already be liable for it. This isn’t something that goes on the “I’ll get to it when I get to it” list, it’s something you’ll have to take care of immediately if things go south.
Talk to your lender about how exactly to remove authorized users. Usually, it’s simple as a phone call or a form online, but you’ll want to be sure.
Additionally, set up account alerts. This will let you know if a particularly high amount is charged to your account, which can be very useful in getting ahead of the game before your bill comes around. It can also help you stop a bad situation before it gets worse by revoking the user’s authorization before they can charge even more.
Enact Smart Financial Habits
Yes, a lot of the scrutiny is on the authorized user, but you need to examine your own habits as well. While your potential authorized user can rebuild their credit by tagging along your account (and perhaps using a secured card too), it’ll be the most impactful if they’re linked to an account that has a long, stable history of being paid on time. If you attach your authorized user to a new account, or one that you always forget to pay, then it won’t help their credit score nearly as much as you’d hope.
Even if your goal with an authorized user is not to build their credit, you’ll want to make sure that you’re practicing smart finances. If your authorized user is relying on your account to pay for an important purchase, professional or personal, there could be real ramifications if you’ve already run through your credit line. You’ve either authorized this person to build their credit or because you expect them to use it, and in either case, it’s crucial that you’re finances are strong enough to hold the account steady. That’s a great goal whether you decide to add an authorized user or not.
Setting up an authorized user is a gesture of trust, that shouldn’t be abused by either party. Although you are running considerably more risk, that doesn’t mean that you shouldn’t think about the potential authorized user at all. Going through these four steps will help ensure that both of you are protected and utilizing account authorization in the best way possible. Make sure that this is really what you’re after— that a joint account wouldn’t better serve your purposes, for instance— and approach the situation with trepidation. With careful consideration, your finances can come out of this no worse for wear.
Need more information about credit cards and accounts? Visit our credit card learning center for more guides. Want more information on credit scores and how authorized users can affect yours? Visit our credit score resource center. Are there debts on your credit report that you are not responsible for? Visit our letter template resource center for help on getting them removed.
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Dayton is a chronic Wikipedia addict, which is detrimental to her social life but stellar for her writing. She resides in Boise, ID, surrounded by her own frantic outlines, highlighted encyclopedias, and potatoes. The latter was not by choice.
This post was updated February 28, 2019. It was originally published September 13, 2017.