Authorized user accounts are big business with credit card companies. Companies are able to extend their user base without finding new customers, simply by adding another person to an existing account. Customers enjoy the highest level of convenience, but, these accounts do not come free of risks. You may add an authorized user to virtually any credit card account that is open and active, but should you?
What Is an Authorized User?
An authorized user grants someone, other than the account owner, full access to a credit card account. They will receive a credit card in their name and have signing authority on the account, enabling them to make purchases without the presence of the account owner. Debit cards do not typically allow authorized users.
When Are Authorized User Accounts Opened?
The three most common uses for these accounts include businesses, spouses, and parents.
Business owners give employees a corporate credit card in the employee’s name, allowing them to make business purchases on the account. Companies then track employee expenses to ensure compliance with spending protocols. The company benefits because they do not have to pay for expenses up front and the employee benefits because they avoid the process of reimbursement.
Spouses use authorized user accounts as a convenience or to help the spouse establish credit in their name. This strategy is particularly helpful with non-working spouses who do not have their own income.
Parents use authorized user accounts to establish credit for their children and teach them to manage accounts responsibly.
What is the difference between a joint account and an authorized user account?
Joint accounts feature joint ownership. Both parties must qualify for the account at the time of application, and both parties are responsible for payments. Each owner has access to 100% of the credit available, and each owner is 100% liable for any outstanding balances, regardless of who made the purchase. If the account falls behind, creditors may seek to collect the full balance, including interest and fees from either owner. A co-signed account and a joint account are essentially the same from a liability perspective.
Authorized user accounts give a third party access to the credit line without any liability for payments. Account management is the sole responsibility of the account owner, regardless of who makes the purchases. If the account becomes delinquent, creditors are only allowed to collect from the account owner, not the authorized user.
Know This: Both joint and authorized user accounts are reported to the credit file of both the account owner, joint owner, and the authorized user, even though only account owners are responsible for payments. Balances, credit limits, and payment history factor into everyone's credit score.
BENEFITS of Authorized User Accounts
Both the account owner and the authorized user enjoy benefits from these accounts, making them very common.
They are convenient. Having someone on an account allows them to pay bills and make purchases on the account owner’s behalf. A business establishes expense accounts for employees. Aging parents with limited mobility can provide access to their account allowing children or caregivers to run errands for them.
They can build credit. Whether establishing credit for the first time or rebuilding credit due to a financial crisis, an authorized user can receive positive marks on the credit file each month on time payments are made. Family members can add an authorized user to their account with or without providing a physical credit card to use.
Convenience for travel. Teenagers and college students have access to funds while away from home. Parents can monitor the account and teach money management skills to their teenagers and young adults. Once the cards are solely in the child’s name, parents no longer have access to account management information unless the child voluntarily shares.
DRAWBACKS to Authorized User Accounts
The convenience of an authorized user does not come without risks. Consider the risks to both the account holder and the authorized user before taking this route.
Account owners take the risk of any account misuse. The credit card provider does not distinguish who uses the card and what charges you may or may not approve. You are responsible for the payment, which may lead to financial struggles due to the poor decisions of another.
When helping to build another’s credit, you may add the person without giving them access to the account, by simply not providing them with the credit card. When others are actively using the account, it would be wise to have clear parameters in writing, so everyone is clear about the expectations.. Restricting the credit limit can also limit your liability. If abuse occurs, you will be required to take the individual to small claims court to collect, while you are liable for any and all charges to the credit card company.
Authorized users do not have control over an account reported on their credit file and will impact their credit score. They will not have access to the account, cannot call customer service, or receive statements. If the bill gets behind on payments or reaches its credit limit, they could see a negative impact their credit score. uRemoving the card from the credit file can be a challenge if the account owner does not cooperate. The authorized user does not have any legal rights to account information and will not be privy to account management information without monitoring their credit report.
Lending applications will typically include the balance as debt and count the payment against any debt to income ratios needed for approval. Additional steps will be required if they want the monthly payment removed from consideration.
Authorized user accounts can be a blessing to both parties. Credit can be established, thin credit files can be made stronger, and account owners can have the convenience of a third party’s ability to make purchases on their behalf.
Careful consideration regarding the long term impact and clear communication around expectations can lead to positive results for both parties.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website here contact-us