Most credit card companies allow their cardholders to add an authorized user to their account – but why would you want to? There are various benefits; for example, you can kickstart your child’s credit history or provide a helping hand to a friend in a financial crisis. While these benefits appear fantastic, hold the phone before you call up your credit card company! Before you add an authorized user to your account, there are some risks to consider too.
What is an authorized user?
An authorized user is an individual who uses someone else’s credit card in their name. Authorized users can use the credit card as their own, but they aren’t the primary account holder. Authorized users don’t have the authority to increase credit limits, add more authorized users, or perform any other administrative activities.
What are the benefits?
Adding an authorized user has benefits for both the primary account holder and the secondary cardholder. Sometimes both parties can benefit from shared card perks, which can be particularly great on fee cards.
- Keeps the account active: Do you have an old credit card that you rarely use? Adding an authorized user will keep the account active, benefiting the primary account holder’s credit. Keep in mind that the account should’ve been well maintained in the past to help the authorized user.
- Stay organized as a family: All of your family’s transactions will appear on one bill. Having all your household expenses in one place helps you stay organized financially.
- Help out family and friends: If your family and friends are trying to build or rebuild credit, adding them to your account can help them get started. That is, as long as your account is in good standing. It can be rewarding to assist a friend or family member with their financial goals. They don’t actually need to use your account – the information from the credit card will simply appear on their report!
- Earn points faster: Typically, only the primary account holder can redeem credit card rewards, such as cash back or points. Having an authorized user make purchases will help you earn quicker. This is particularly beneficial for families that share household purchases, making any of the three PC Financial Mastercards an excellent choice for joint earnings. By collecting together, you can treat the entire family to free groceries and merchandise more often.
- Boost your reward rate: Although this feature is pretty niche, it can be rewarding. Cardholders of the new BMO eclipse Visa Infinite* Card can earn 10% more BMO Rewards points if they have an authorized user on the account. Similarly, the high-end BMO eclipse Visa Infinite Privilege* Card offers members 25% more rewards if they add a supplementary cardholder. However, the latter card does have a steep annual fee at $499 for the primary cardholder and a $99 fee for each additional authorized user.
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- No legal responsibility: Authorized users don’t have the legal obligation to pay off their credit card debts.
- Build credit: If you haven’t established credit yet or need to rebuild your rating, becoming an authorized user is an easy way to start. Even if you don’t use the account, the activity will be reflected on your credit report and can help boost your credit score.
- Benefit from good habits: If the primary account holder uses their credit card and manages their other debt responsibly, their good habits will reflect on your credit score.
What are the risks?
As with everything in personal finance, there are risks to using authorized users in addition to benefits. Here are some of the disadvantages of authorized users for both the primary and the secondary cardholder.
- Money and relationships: Sometimes, money and relationships don’t mix. Before adding an authorized user to your account, make sure it’s someone you trust and are willing to have difficult financial conversations with if needed.
- Responsible for credit card payments: If the authorized user makes large purchases on the credit card, the primary cardholder is legally responsible for repaying it. For this reason, it’s crucial to choose authorized users who you trust will manage their debt responsibly.
- Risk optimal credit: If you maintain a good credit utilization ratio or credit score, you could risk it by adding an authorized user.
- Harm to your credit: If the primary account holder isn’t responsible for their credit card and other debt, their poor habits will reflect on your credit score.
- Builds history, not payment history: Being an authorized user adds to your credit report’s history, not payment history. Authorized users are not responsible for repaying the credit card debt, so this won’t show on their report. Payment history is an important aspect of credit, but you’ll need to get a credit card, or another form of credit in your name, to establish this.
- Not reported to a credit bureau: If the specific credit card company doesn’t report authorized users to one of the two primary credit bureaus in Canada, TransUnion and Equifax, then your credit won’t improve. You can call the credit card company to determine whether they report to the credit bureaus or not.
Who should you add as an authorized user?
Adding an authorized user to your account is the beginning of a financial relationship. For this reason, anyone you add as an authorized user should be someone you trust and with whom you can communicate.
It’s common for parents to add their children as authorized users on credit cards. This gesture allows their children to have an emergency payment method, learn about spending, and start building credit early. Usually, this process begins when children reach their teen years. Teaching teens about personal finance can help them develop healthy financial habits that will stick with them their entire lives.
As for friends, it’s reasonable to be skeptical about adding someone with a lack of credit or poor credit as an authorized user to your credit card. Keep in mind that little or poor credit is not always a sign of the inability to manage finances responsibly. Sometimes people lose their jobs, become sick or run into unavoidable emergencies, impacting their credit. Helping out a friend going through a financial crisis is rewarding and can strengthen your relationship. However, you should still be wary of friends who may struggle with healthy financial habits as you need to protect your finances first.
Other people you might add as an authorized user include spouses, parents, siblings, employees and significant others. You can add almost anyone to your credit card as an authorized user, but make sure it’s someone you know well and trust!
Lending a helping hand
Adding an authorized user to your account can help others achieve their financial goals. But remember, you can only help others if your credit is in good standing. Most importantly, you should always put your personal financial needs first.