You may have heard of the idea of ââbeing an authorized user on a credit card. Or maybe someone asked you to be added as a user to your account. But does being an authorized user create credit? Here’s what you need to know.
What it means to be an authorized user
An authorized user is someone who has been added to use an existing credit card account.
This is how it works:
- If you need help building a credit history, you can ask a parent, sibling, or friend to add you as an authorized user on their credit card.
- The credit card company will issue your own card to this account.
- You can use this credit card in the same way you could use a card that you applied for yourself.
If you are asked to add someone as an authorized user, it is the same case. Once that person is on your account, they can charge expenses to your credit card account.
How Being an Authorized User Helps Create Credit
Here’s how being an authorized user can improve your credit:
- Any positive payment to the credit card account is reported to the credit bureaus.
- It creates more credit history for you.
- As long as payments are made regularly and on time, your credit score can increase.
If you’ve never had a bill or a credit card account, you might find yourself in a frustrating situation where you can’t get a credit card or loan approved because of your history. missing credit. But if no one approves you, you can’t build that credit history.
Likewise, you may have a difficult payment history due to being late with some bills during a difficult time. When your payment history (which is a testament to how quickly you process your bills) is poor, it can hurt your chances of getting approved for a credit card or loan. Either way, if you need to build up credit fast, becoming an authorized user on an existing credit card account can be a good solution.
When you are added as an authorized user to an existing credit card, any positive payment activity on that account is added to your credit report. Suppose your parent adds you as an authorized user on their credit card, and then pays that credit card in full every month for 12 consecutive months. This positive activity will also be part of your credit history and it will reflect on your credit report.
The result? A stronger credit history if you are missing one, and the potential to increase your credit score if it needs work.
The benefits of being an authorized user
By becoming an authorized user on an existing credit card, you benefit from the responsible payment activity of the primary cardholder.
Here are some of the benefits of going this route:
- This can make building credit easier.
- You could improve your credit score faster.
- You can use the credit card to which you have been added.
That said, you will need to establish some ground rules with the primary cardholder before using that card. Since this person is doing you a favor, you will need to agree on how much you are allowed to spend on this card and how and when you will pay your share of the bill. If you charge for expenses that you can’t pay, you’ll let the primary cardholder cover those charges or risk a late payment on their file.
The disadvantages of being an authorized user
When you are added as an authorized user to an existing credit card account, you rely on the primary cardholder to be financially responsible and make timely payments to that account. If the person adding you as an authorized user is in arrears with their payment, it could negatively impact your payment history.
Therefore, you should only ask someone you trust to add you as an authorized user to an existing account. Ideally, this person will be someone who already has good credit (or better yet, excellent credit) and a stable job.
Should you add someone as an authorized user to your account?
It depends. You may want to help a loved one by adding them as an authorized user to your credit card.
But before you do so, consider the risks:
- If your authorized user doesn’t pay their fees, you could find yourself stuck paying the bill.
- If you cannot cover these charges, you may owe interest charges.
- If your credit card has a high APR, that credit card debt can be costly.
- Too high a credit card balance can damage your credit score.
One factor that goes into your score is your credit utilization rate, which measures how much of your available line of credit you are using at a time. The higher this ratio increases, the more damage your credit score could be.
Here’s what to consider before giving someone authorized user status on your credit card account:
- Make sure it’s someone you trust.
- Confirm that they have an income to cover their costs.
- Establish clear rules for using the card and paying bills.
For example, if you add an authorized user to a credit card with a credit limit of $ 5,000, you may decide that they cannot bill more than $ 1,000 in a given month. And you can decide that your authorized user should write you a check for their share of the bill every week, every two weeks, or every month. The details are up to you, but the key is to make sure you don’t hurt yourself while helping someone build credit.
Alternatives to become an authorized user
If you need to improve your credit score or build up a credit history, becoming an authorized user on an existing credit card account isn’t your only solution. Another option is to open a secured credit card.
With a secured credit card, you deposit a deposit that serves as a credit limit. When you charge expenses on this credit card and pay your bills on time, this positive activity gets added to your payment history.