Ins and Outs of Authorized Users

When a new or replacement credit card arrives, one of the first promotions you get is marketing which offers the ability to add an authorized user. This feature is included with virtually any credit card. A simple phone call or a few clicks in your online account will allow you to add virtually anyone as an authorized user on your account. But should you take advantage of this account feature?

The most common authorized users are spouses, children, and business employees. It adds a level of convenience for both the account holder and the authorized user, when used correctly. Credit card issuers encourage authorized users because one more person spending on an account can increase their profits without taking on any additional risk.

What is an Authorized user and what are the considerations you should make when deciding if this is the best option?

What is an Authorized User Account?

An authorized user is an individual who has the ability to make charges on your account for any purchase they deem necessary. Ideally, they will use the card within the parameters you have set. You are responsible for any purchases they make, and they have access to your credit line for as long as they are approved on the account.

Difference between Joint and Authorized User Accounts

The key difference between an authorized user account and a joint account is liability.

Joint Account: With a joint account, both parties are liable for any charges either party makes to the credit card. Each party has access to 100% of the line of credit, and each party is 100% liable for all charges made on the account. If one party fails to make payments, the other is legally liable (you owe) for the entire balance, regardless of which party actually made the charge. Joint accounts and co-signing is essentially the same when it comes to legal responsibility for payments.

Authorized User: An authorized user has legal access to the account but carries no liability. Therefore, the authorized user can use the account as if it is their own, yet the account holder is liable for all payments. An authorized user can never be sued by the credit card company for charges on the account. They can be added with or without permission, and they have not entered into any agreement with the credit card company regarding payments. The account holder is still 100% liable for all charges made by the authorized user. You, as the account holder are essentially granting blanket approval to use the card as they see fit. Any agreements on spending are between the account holder and the authorized user, not the credit card company.

Advantages of Having an Authorized User

There are a number of benefits for both the recipient and the account holder when it comes to adding an authorized user to an account. A few of these include:

  • Convenience: When another person is able to use your account, you are able to pay for purchases without actually having to be present to sign. Businesses love this feature and often grant employees authorized user accounts that operate as an expense account.
  • Teach Money Management Skills is a strategy parents sometimes use to teach children about money. This can be accomplished with either a prepaid or authorized user card. The child can make charges and payments while the parent has control over the account, ensuring the child does not run into trouble when they are just getting started.
  • Travel is becoming common among teenagers and college student. Traveling with school groups through school sponsored trips can help them gain independence and experience. During these times an authorized user card will prevent the child from needing a lot of cash, while still staying within a designated budget.
  • Build Credit. Children and non-working spouses can build credit without income through an authorized user account. They are able make charges on the account (if you give them a card) and the account will be reported on the authorized user’s credit report creating a credit score.

Risks of Having an Authorized User

With all of the conveniences, there are two primary risks to consider:

  • Risks to the account holder: The account holder bears 100% of the responsibility for payment, even if the card is abused. If an authorized user spends beyond agreed amounts, or charges are made which were not authorized, you are still legally liable for the debt. To collect damages, you would be required to sue the authorized user for any recourse.
  • Risks to the authorized user: The account holder has total control over an account that impacts your credit score. If late payments are made or high balances carried, the authorized user’s credit will reflect this activity. An authorized user has no control over how much is charged on the overall account, nor when payments are made. You won’t receive a bill or notifications if the account becomes delinquent.

Actions Required to Eliminate an Authorized User on an Account

Account Holder: An account holder can call and add an authorized user at any time. Once an authorized holder is added, cards will be sent to the address on the account, and you can manage the cards based on your needs. Permission does not need to be granted by the authorized user to add them to the account. If you decide you no longer want a person to have access to the account, you can cancel the card at any time.

Authorized User: Calling the credit card provider can be an uphill battle because they only want to talk to the account holder. The card issuer, however, cannot force you to be an authorized user. The simplest way to eliminate an account is to ask the primary account holder to call and cancel the card. If that is not an option, you can dispute the account and add this “account is not your responsibility,” on your credit report. That will generally be enough to get the card closed. Accounts are sometimes completely removed off your report. Other times they will be listed as closed with a zero balance. Either way they will no longer help or hurt your credit and it will no longer be considered in the credit score algorithm.

Impact on Credit

An authorized user status can improve or establish credit for a “thin” or non-existent file. Assuming payments are made on time, the account will be reported each month, giving positive traction to the credit file. Having one or more authorized user accounts for six months or more will generally provide a credit score for the file or improve one that only has negative information. This will enable you to establish or improve the credit score without needing a secured credit card.

When seeking a loan, however, the account could work against you, if the balance (and payments) are added to the debt to income calculation. This action could result in a lower approval amount or even a denial. When this occurs, assuming there is other positive credit on the report, removing the account may be the best course of action.

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