The idea of adding an authorized user to a credit card account is often considered to be as risky as cosigning a loan: many advise not to do it. There’s always the lingering fear that an irresponsible individual could ruin your credit profile if you give him or her the benefit of the doubt. Unlike cosigning loans, however, there are ways to reduce the risk with an authorized user.
Because the card limit for an authorized user is shared with the primary cardmember, purchases from any card user will directly affect the spending ability of everyone else on the account.
If an authorized user spent $900 on a credit card account with a limit of $1,000, you would only be able to spend $100. Such a situation would prove to be a major inconvenience if you happened to need to use your credit card in an emergency. Additionally, a high balance also means that your credit score could take a dip.
Talking to authorized users about how they should use their cards (e.g., setting guidelines and noting that the card is only for emergencies) is always a recommended step before giving access to your credit line. However, they might not listen.
Restrict Spending Potential
When an authorized user appears to be abusing their access to your credit card, you should consider placing a spending limit.
Your credit card issuer may allow you to impose spending caps on authorized cards for the sole purpose of controlling the balance that the secondary user can accumulate.
For example, American Express allows primary cardmembers to place a cap of at least $200 to the maximum credit limit. Check with your card issuer about their policy.
Putting a spending limit will not affect the authorized user’s credit profile since the total shared credit limit will still appear on his or her credit reports.
Cut the Cord
If restricting an authorized user’s spending limit is not possible, then the last resort would be to remove the authorized user entirely. Again, this step will not have a negative effect on your credit profile.
To ensure that the authorized user is able to continue to build credit, he or she should think about applying for a credit card before you cut them loose — since the credit line they currently share with you can still be used to display creditworthiness.
In the event that the authorized user is not yet able to qualify for an unsecured credit card, then a secured credit card may be a viable option. (For many consumers, a secured credit card may have been a good alternative to authorized card access in the first place.)
Secured credit cards require an upfront cash deposit to act as collateral while cardmembers have to show that they’re capable of making monthly payments on time. Due to the low credit limits often placed on secured credit cards, borrowers are less likely to overspend and more likely to exhibit responsible financial behavior, which would establish a trustworthy credit profile.
The Non-Credit Route
When all credit-linked options have been exhausted, and someone still cannot show the capability to handle credit, then maybe this person is not yet ready to build credit. Instead, you may have to help this person build good financial habits first.
Joint checking accounts and prepaid debit cards are two ways that someone can learn to not spend more than they have. Both allow for spending limits on individual cards, which can actually serve as practice before the transition to authorized-user status on a credit card account.
Whether you’re a cardholder or an authorized user, it’s always important to monitor your credit. A free tool like Credit.com’s Credit Report Card can give you your score and a breakdown of which areas of your credit history need work. Building — and maintaining — good credit takes awareness and work.