Trusting Your Roommate: Joint Accounts and Authorized Users
You’ve just moved into an apartment with a new roommate. Maybe they are your significant other; maybe they are a friend from college. In either case, it might be a good idea to open a joint account to help pay the bills. Or, maybe just adding them on your credit card as an authorized user will do the trick. What’s the difference between the two, and how should they be used?
You need to stay in the city because that’s where your job is. The commute is too long to be viable. So you get an apartment. But with today’s rent prices and the pittance you are making at your barely-better-than-entry-level job, you need a roommate.
Gen X is usually portrayed as two strong, independent people moving into an abode because they just declared their love for each other. For millennials, it’s a far more pragmatic choice, and in many cases a necessity of living. Love does not dominate this decision; money does.
With a joint account, it’s easy to pay utilities, rent, your Netflix subscription, and any other bills you might share. A joint account is exactly what it sounds like: a setup where you and another person share the account. You can both deposit and withdraw, and can charge or debit to the account with cards. The account affects both of your credit scores, meaning if neither of you pays the minimum bill in a month, both of your credit scores will go down. It’s a great option for blending finances after marriage, as well as occasionally just being generally convenient.
A good practice in this case would be depositing a set amount from each paycheck in the joint account. Use it only to pay bills, also keeping separate accounts. This doesn’t just apply to roommates, however, as significant others can also benefit from this practice.
While having a joint account when in a relationship can certainly simplify and streamline paying bills, having your own account for your own expenses — a new video game, a book, etc. — can help you budget needs vs. wants.
Risks of a Joint Account
However, as alluded to for credit scores, there are risks to opening a joint account. Should one of the account holders die, the surviving co-owner may have a full claim to the contents of the account, regardless of what is written in a will. The legal considerations aren’t always straight-forward.
Divorce, liens, judgments or garnishments also affect the account. For example, if one of the co-owners of the account receives a loan, but defaults on the loan, the account could be used to pay back said loan without the other co-owner’s permission.
Unlike a joint account, having an authorized user on an account limits liability. The authorized user is not responsible for paying the account’s bill, but can still use a credit or debit card on the account.
Depending on the account issuer, the authorized user’s credit score might also benefit from being on the account. Based on the account’s age, credit utilization ratio, and whether payments are made on time, the authorized user’s credit score will improve.
Risks of Authorizing Users
However, this is not a two-way street — the account holder’s credit score is not directly affected by the authorized user. However, if the authorized user racks up debt, it affects the credit utilization ratio, and in turn the account holder’s credit score, as well as the authorized user’s score. This can compound to not being able to make payments, further negatively affecting the scores.
With little skin in the game, you need to trust the authorized user. With a joint account, co-owners have a vested interest in the health of the account, ensuring bills are paid on time. An authorized user could do damage to the account and then remove their name, leaving the primary account holder with debt and credit score penalties. If it is your account, make sure whoever you are authorizing is not going to cut and run after going on a shopping spree.
Because of this it is fairly common for authorized users to be the children of account holders. This may not help with your roommate situation, but may be something to consider asking your parents about — especially if you have no plans for using their card without their permission.
Whether you start an account with someone or simply make them an authorized user on your account, a certain level of trust is needed. If you can trust the person to make financially sound decisions, one or both of you could benefit, as well as have a convenient way to pay joint bills such as rent.
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Cole Mayer is an online marketing specialist and corporate blog writer. A former newspaper journalist, he spends his free time freelance writing, playing video games, and learning about every subject under the sun. Follow Cole on Twitter: @ColeMayer42
This post was updated July 9, 2017. It was originally published July 11, 2017.