Will Adding an Authorized User Help Their Credit?
An authorized user is an individual that can make purchases using your credit card account. However, unlike a joint account holder, they’re not legally responsible for paying back the debts that either of you incurs.
Notably, in addition to giving them access to your credit line, adding someone as an authorized user can help their credit. Here’s everything you should know about the process, including how it works, the risks, and the alternatives.
How Does Adding an Authorized User Help With Credit?
For people that manage their credit cards well, adding an authorized user to their account can help build the authorized user’s credit significantly.
A credit score is essentially the numerical output of a proprietary formula. Adding someone as an authorized user can help their credit score by positively influencing several variables in that formula. For example:
Payment history: Authorized users generally aren’t responsible for paying back the debts they incur, but they usually still get credit for it. As a result, making monthly payments on time for the shared account helps them build a positive payment history and improve their credit score.
Amounts owed: Much like maintaining a positive payment history, authorized users will benefit from a low credit utilization on the accounts you share with them. If you can keep the amount you owe to less than 10% of the card’s total spending limit, it should help their credit.
Length of credit history: When you add an authorized user to your credit account, the age on their credit report is the same as yours. For example, if you open an account in 2005 and add them in 2020, it’s as if they held it since 2005 too, and a longer credit history is always beneficial to their credit score.
Credit mix: Last but not least, adding an authorized user to your account adds a revolving credit account to their credit report. Having a diverse mix of installment and revolving debts is beneficial to their credit score.
Fortunately, adding an authorized user to your account doesn’t require a credit check for either party. That means it can’t do any harm to the fifth and final factor in your credit scores, new credit activity.
All that said, adding an authorized user to your account is only an opportunity to build a good credit score. If you or the authorized user misuses the card, both of your credit scores can suffer.
Risks of Adding an Authorized User
When you add someone to your credit account, there are undeniable risks to you as the primary cardholder and the newly authorized user. Let’s look at the potential downsides for both parties, starting with the primary account holder.
First and foremost, there’s the risk that the authorized user could spend money that they’re not supposed to spend. After all, they can use your credit line as much as they want with no responsibility to pay whatever credit card debt they incur.
They could max out your credit card if they wanted to, and you’d still be the only party liable for the balance. Not only is that a financial risk, but it also represents a significant risk to your credit score.
The two most significant factors in your FICO score are your payment history and amounts owed. An authorized user has the power to negatively affect both by racking up balances and neglecting to pay them.
That’s why so much trust goes into adding someone to your account and why so many people only do it for their children. Even then, it’s common to refrain from giving them a copy of the card or even informing them.
Next, let’s discuss the risk to the authorized user. They don’t have any financial downside, but there’s no guarantee adding them to the account will improve their credit either.
If either of you makes a mistake with the shared account, it will typically hurt both of your scores. For example, missing one of your monthly payments or inflating your credit utilization will cost you both.
Because of these risks to both parties, it’s a good idea to sit down and make sure everyone is on the same page before adding anyone as an authorized user.
Just like you would with a joint credit card, confirm how much each person can spend and who’s responsible for paying what.
Can You Remove an Authorized User?
Fortunately, adding an authorized user to your account is never permanent. If you want to revoke their status, you always have the option to remove them from your account.
This method varies between credit card companies, so check your provider’s website to confirm the easiest way to do so.
For example, Chase lets you add authorized users online as long as you have their name, date of birth, and address, but you’ll have to call their customer service if you want to remove someone.
If you’re removing an authorized user because they’ve abused their privileges, you probably don’t care what it will do to their credit. However, if you’re thinking of doing so because your child has become independent, know that it could hurt their score.
When you remove an authorized user from your credit card, it can affect their credit in one of two ways. The credit card company may stop reporting the account’s activity, or its history could disappear from their report altogether.
Either one can have a negative impact on their score by weakening their payment history, increasing their credit utilization ratio, decreasing the age of their credit accounts, or reducing their positive credit history.
If you’re still on good terms with the person you have as an authorized user, consider checking in with them and discussing whether it’s a good time to remove them.
Why a Credit Builder Loan Is a Better Option
Adding someone as an authorized user is a great way to give them a quick boost to their credit, especially if they have a thin credit file or a bad credit score.
However, it’s no substitute for having them start a credit history of their own with something like a secured credit card or installment account.
In fact, if you’re thinking about adding an adult child to your best credit card as an authorized user to help them build good credit, they might be better off if you suggest a credit builder loan like Credit Strong’s instead.
Our credit builder loans are installment accounts that place the proceeds in a locked savings account upon approval. The borrower then makes monthly payments and steadily pays off their principal balance.
As they do, we report their payments to each major credit bureau. We’ll also give them regular score updates so they can be sure they’re building credit.
Once they pay off their loan in full, we release their funds, and they’ll finish the process with a higher score and a nice chunk of change. Consider suggesting it today!
FAQs
Will Adding My Child as an Authorized User Help His Credit?
Adding your child as an authorized user can definitely help their credit. However, it ultimately depends on the circumstances, including how you both use the account and the other items on their credit report.
In general, adding your child as an authorized user should benefit their credit as long as you make all your monthly payments on time and keep your balance on the account at a reasonable level relative to the account’s credit limit.
Those represent the two most significant factors in your credit scores. Namely, your payment history and amounts owed. Managing them both well is the best way to ensure the account helps your credit score and the authorized user’s.
Whether or not you make your payments on time is pretty black and white, but the maximum balance you can have on your credit account is somewhat gray. However, you should generally utilize no more than 10% of your credit for the best results.
That doesn’t mean you should let your balance carry over from month to month, though. It just means you shouldn’t let your balance exceed that level on the statement date. You should always pay off your balance in full before it’s due to avoid accruing interest.
How Much Will My Credit Score Go Up if I Become an Authorized User?
It’s impossible to say for sure how much becoming an authorized user will help your credit score since the answer can vary significantly depending on the circumstances.
However, you can guess the approximate effect by considering how the new account impacts the most significant factors that go into your credit score. For example:
Payment history: Your payment history is worth 35% of your Fair Isaac Corporation (FICO) score, making it the most important variable. As long as you or the primary account holder make all the payments on time and in full, your credit score should go up significantly.
Amounts owed: The amount you owe on your credit accounts is worth 30% of your FICO score and the second most important variable. The lower you can keep the balance on the card, the more your credit score should increase.
Age of credit accounts: The length of your credit history is worth 15% of your credit score, and having older accounts is always better. If you add someone to your account that’s many years old, their credit score will go up more than it would if you had added them to one you had opened recently.
Note that these changes can help you assess the impact becoming an authorized user will have on your credit score, but the actual result also depends on your starting point.
For example, someone with a 600 credit score and a thin credit file will probably see a more significant boost from being an authorized user than someone with a 700 credit score and a few other credit accounts on their report.
Will My Credit Score Go Down if I Add an Authorized User?
Adding someone to your credit card as an authorized user never impacts your credit score. Neither you nor the authorized user needs to undergo a credit check to put them on your account.
However, adding an authorized user does expose your credit score to some risk. For example, if they abuse their privileges by spending more than they’re supposed to, your credit score could go down.
That would inflate your credit utilization ratio and amounts owed, which could cause you to miss one or more of your monthly payments.
As a result, you should only add someone as an authorized user to your credit card if you trust them. Alternatively, if your only motive for adding them is to build their credit score, you could do so without giving them physical access to your credit card.
Your responsible use of the account would still benefit them, but there would be no risk that they could overspend or otherwise misuse the credit line.
Does Taking Someone Off as an Authorized User Hurt Their Credit?
Taking someone off the authorized user account can hurt their credit in some situations. However, it’s also possible that removing them could be beneficial or neutral to their score.
Ultimately, it depends on the circumstances, including how well you’ve both managed the account in question and what else is on their credit report. For example, removing them might hurt their credit in the following circumstances:
You’ve made all payments for the account on time, and they don’t have any other payment history.
Without the credit card on their credit report, their overall credit utilization ratio increases significantly.
The account was the oldest credit card on their credit report.
Naturally, in the opposite kinds of situations, removing the account could benefit their credit. For example, removing an account with a recent late payment could actually improve their score.
Because it depends so significantly on the circumstances, it’s a good idea to discuss with your authorized user whether or not it’s worth removing them before contacting your credit card issuer.
After all, if they’re not actively using your credit card, it doesn’t cost anything to leave them on the account.
The post Will Adding an Authorized User Help Their Credit? appeared first on Credit Strong.
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