Credit cards, personal loans, mortgages and other types of credit offer multiple account options, and keeping track of all of them can be confusing. This is especially true when it comes to the options that allow you to share a credit account with other individuals. Despite some basic commonalities, these account options aren’t created equal, as each one has its own specific set of advantages and risks when it comes to maintaining good credit. Read below as we talk about the differences among the various ways you can share credit accounts and how each one affects your credit reports and scores.
What is an authorized user? An option that’s offered by most credit cards — and something we’ve talked about before — an authorized user is someone who was granted permission by the account owner to charge purchases to their credit card. Unlike the other account-sharing options we detail in this post, an authorized user is not liable for balances incurred on the credit card, even ones they’ve personally charged to the account. The most common purpose of such an arrangement is to allow a family member, such as a spouse, teenager or college student, to use the card if/when they need to. For example, someone may choose to add their spouse as an authorized user so all household expenses are in one place, which makes budgeting a little easier, while a parent may add their teenage or college student to monitor their spending and teach them about credit.
How does an authorized user relationship affect your credit? For a primary cardholder, allowing someone to become an authorized user offers some risk, especially since the person is allowed to make purchases, but not held responsible to pay for those purchases. As you can see, someone who becomes an authorized user doesn’t have much risk, especially when becoming an authorized user is compared to cosigning or becoming a joint account holder, both of which we detail below. Becoming an authorized user may or may not affect your credit, as we’ve noted before, because not all card issuers report card activity to an authorized user’s credit reports. As such, it’s important for anyone being added to a credit card to understand that becoming an authorized user is a privilege that shouldn’t be taken for granted, as misuse of the card has the potential to hurt only the primary user’s credit scores. Adding authorized users to your card has risks, with the main concern being that the primary cardholder will be responsible for any unpaid balances left by the authorized user. Fortunately, should the worst case scenario occur, this arrangement is a bit easier to cancel than the others detailed in this post.
What is cosigning? In a cosigning arrangement, another thing we’ve written about before, one individual leverages their credit and finances as a guarantee against the primary cardholder’s risk of defaulting. By doing so, the cosigner is agreeing to cover the bill if the primary cardholder fails to make payments. Cosigning is most common among family members, usually between a parent and a child, especially when it comes to college financial aid, or between spouses hoping to help the other person open a loan, credit card or another type of credit account. In some cases, a cosigner does not have the right to use the credit, meaning that they cannot actually charge anything to the credit card or spend the funds they’re cosigning for. It should be noted that cosigners are often compared to guarantors but, while both arrangements are extremely similar, guarantors have slightly more protection than cosigners in the instance of account default. For example, banks have to take extra steps before a guarantor is required to pay, essentially meaning that requesting payment from a guarantor is a last resort (whereas cosigners are typically seen as a first resort option). Aside from this, however, there is little difference between being a cosigner or a guarantor.
How does cosigning affect your credit? Cosigning has different effects based on the role the person plays in the cosigning relationship. For the beneficiary, the cosigner’s credit history is what allows them to qualify for a credit account and potentially build their own credit. The cosigner, usually the individual with the higher credit scores, essentially puts their own credit on the line in a gesture of trust to allow the beneficiary to open the credit. Because a cosigner essentially provides the primary cardholder with the eligibility needed to obtain a credit card, loan or other type of credit account, it’s often difficult for a cosigner to cancel this type of account if they no longer want to cosign. This is especially true if the cosigner attempts to do so without the cardholder’s permission or before any balances on the account are paid off. As such, cosigning should only be considered when a potential cosigner has absolute trust in the primary account holder, or when the cosigner will be in control of how the credit account is used, especially since misuse of the account will hurt both individuals’ credit scores. While the consequences of being a cosigner are essentially the same as those for guarantors, if you have the choice (note that cosigners are more common), you may want to choose being a guarantor so you are given some of the protections that type of relationship has.
What is a joint account? While this option isn’t as common with major credit card issuers, some credit unions and a small number of banks allow two individuals to sign-up for a single credit card — note that this type of agreement is much more common with loans or mortgages. A joint account, also known as a co-account, grants both account holders equal privileges when it comes to the credit account. As such, both account holders are equally responsible for any unpaid balances.
How does a joint account affect your credit? Unlike the other two account-sharing options we noted above, a joint account affects both individuals’ credit scores in exactly the same manner, and as such, both individuals must independently qualify for the credit account in order to open it. Since joint accounts have this type of relationship, they also have a high degree of risk associated with them because the actions of one joint account owner can severely impact the wallet and credit scores of the both account owners. That said, if the joint account owners are responsible with the credit account, meaning they pay on time and in full, they’ll be rewarded with a positive credit history they built together. Before you consider signing onto any joint account relationship (if your bank allows it), you’ll want to make sure you completely know the person you’re planning to share the account with, as well as understand their credit habits.
Which account-sharing option should you choose?
There are many reasons why a person might be interested in sharing an account with someone, but the most important thing to keep in mind before you sign onto sharing an account with someone is your role in such an arrangement. Who will be using the credit account? Are you leveraging your own credit on behalf of someone else? Who will be left responsible for any unpaid balances? Sharing a credit account is not a decision to take lightly, as it could have devastating consequences on your future credit scores. By considering these questions ahead of time, you’ll be able to evaluate the risks involved in sharing a credit account with someone and determine the best account-sharing option for your situation.
For more information about managing your finances, keep reading our personal finance blogs.