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Adding authorized users to your credit card can serve a few different purposes, from helping you rack up bonus points to sharing your perks and spending power with friends or family members. It also carries a power that extends far beyond the world of points and miles and can improve a number of aspects of your financial life. Today we're going to take a look at how being an authorized user helps you build credit.
Does being an authorized user help me build credit?
If it wasn't for the power of authorized user status, I'd be at least three or four years further behind in my own points and miles journey. As a 19-year old student in college my dad added me as an authorized user on a credit card he'd held for 25 years to pay for my textbooks. That account appeared on my credit report, and at the ripe old age of 19 I was able to "borrow" 25 years of credit history and on time payments from my dad, giving me a starting credit score of 740. From there I had no trouble getting approved for some of the premium rewards credit cards in my own name, and I was off to the races and I haven't looked back.
Of course, if my dad had been fiscally irresponsible his entire life this could've backfired. If he had a long history of late or missed payments, those same bad marks would've appeared on my credit report when he added me as an authorized user. In this sense I think it's unfair to say that being an authorized user helps you build credit. However, it can be a way for parents to help their children start responsibly establishing credit.
Find out what a credit report is and why it's important to help you build your credit.
When to add an authorized user
There are a number of different reasons you might want to add an authorized user, many of which overlap nicely with scenarios where someone is trying to build their credit history:
- Helping someone with a limited credit history: If you have a child or sibling over the age of 18 who's never had a credit card before, adding them as an authorized user can help them build credit history at a time when they may not be able to get approved for cards on their own. The same goes for immigrants to the US, or even adults who simply haven't used credit much before.
- Help someone repair credit: Being an authorized user can help you build credit from scratch, and it can also help you repair your credit if you've had a bad stretch of missed payments or a bankruptcy. Obviously there are some risks here, and you'd want to be careful not to spread your own financial problems to someone who is trying to help you.
- Expense management: Many married couples find it easier to manage bills when they're authorized users on each other's cards instead of opening separate accounts. Even if both parties have a solid credit score, keeping everything under one roof can be easier. You also might want to add an employee to your business credit cards to allow them to make purchases for the business, but more on that in a moment.
- Sharing perks: Some credit cards allow authorized users to share perks like lounge access, elite status or travel credits, though these cards often impose a fee for adding authorized users.
Find out how often a credit score updates, before you see a boost or drop in your score.
Risks to be aware of
There are two concerns to be aware of when considering adding an authorized user. The first is that the primary account holder will be responsible for all charges made on the authorized user card. So, if you give your college age kid access to your card and they rack up a large tab, you're on the hook for the bill. There is an easy workaround for this: If your only interest in adding an authorized user is credit building, you can add the authorized user but never give them the physical card. Just keep it in your desk drawer--they'll still get the credit benefits but won't have the opportunity to do any financial damage.
The other consideration is that sometimes being an authorized user on a card prevents you from opening that same card yourself and earning a welcome bonus on it. This varies greatly between issuers, and you can usually resolve this problem with a quick phone call explaining the situation.
Authorized user vs. co-signer vs. employee card
All of the benefits we've discussed here apply to being an authorized user on someone else's account, but there are a few similar terms that might get confusing. The first is a co-signer, something that's increasingly rare among the big banks. In fact out of the largest US credit card issuers, only Bank of America, Wells Fargo and US Bank allow for a co-signer. Unlike an authorized user, which can be added and removed at any point in time, a co-signer comes in during the application process. This is someone with good credit who guarantees that they will pay your bill if you default, decreasing your risk profile and making you more likely to get approved for a new card. Of course the co-signer assumes some financial risk here, so you should think carefully before agreeing to co-sign for a friend or family member.
While businesses might see more of an immediate day-to-day benefit from adding "employee cards" for expense management, the employees usually won't get the same credit benefits as authorized users do. This is because most business credit cards don't report on your personal credit report. They pull your personal credit report to approve the account, so you'll see an inquiry from the application, but the balance and payment history do not show up on your personal credit report. This is great if your business has large expenses that you don't want interfering with your credit score, but it means that most employee cards won't carry any credit score benefits.
Bottom line
Adding a family member or friend as an authorized user is one of the fastest ways to help them build good credit, and if you choose to hold onto the physical card there's no financial risk in doing so either. Just remember that the primary account holder will be responsible for all charges made, so if you plan on giving your authorized user the physical card to spend on you should sit down and have a frank conversation about their budget and financial situation.
