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As you teach your kids about money, an important concept is how to use credit responsibly. Adding your children as authorized users on your credit card is one way to help teach sound credit management skills, and it might give their credit scores a head start.
Read on to learn the best time to add your child as an authorized user on your credit card account. You’ll also discover why this credit-building strategy can be so effective.
An authorized user is someone you add to a credit card account that has been issued in your name. You give the authorized user your permission to make charges on your account, but that person isn’t responsible for the debt. The liability lies with you, the primary cardholder.
You can typically request to add an authorized user online or by calling your credit card issuer.
If your account is open and in good standing, the bank will issue another credit card with the authorized user’s name on it. It’s up to you whether you actually turn the card over to your authorized user to make charges or tuck it away for safekeeping.
Adding an authorized user to a credit card could potentially affect your credit and the credit of the person you connect to your account. The actual impact will vary based on how the credit card is managed.
When you add your child or anyone else to your existing credit card, it may help that person build credit.
“With good payment behavior and responsible use, adding an authorized user may have a positive impact on the authorized user’s credit score,” says Monica Weaver, head of branded card partnerships and experiences at Capital One.
For a credit card to build positive credit history, look for these factors:
Why is payment history so important? It’s the No. 1 factor influencing your credit score – followed by how much credit you use. Length of credit history isn’t as influential, but it’s still helpful.
“If you are responsible with (your credit card), it’s very helpful to give (your child’s credit) a jump-start when they are in a position to begin building credit on their own,” says Shanté Nicole Harris, financial educator and credit consultant with Financial Common Cents.
It’s worth noting that most, but not all, card issuers report authorized user accounts to the three credit reporting agencies: Equifax, TransUnion and Experian. If a card issuer doesn’t report the account to credit bureaus, it won’t help your child’s scores at all.
There could be downsides to adding your child as an authorized user: You are responsible for a potentially larger bill, and with a larger bill comes a higher credit utilization ratio.
The action of adding your child to your existing credit card account won’t have any impact on your credit score. Nothing on your credit report indicates whether your credit card is used by authorized users or just the primary account holder.
Yet your credit could be impacted if your child makes charges on the account. You’ll be responsible for paying those charges – though of course you can make an agreement with your child to pay them. You should plan to pay your full credit card balance each month, including your authorized user’s charges. But if your authorized user runs up your bill, you might not be able to pay the full amount and need to start carrying a balance. That will drag down your credit score. Your credit utilization ratio will go up, too, since you and your kids are charging more in total. This also dings your credit score.
While adding your children as authorized users and giving them access to make charges can provide a training-wheels credit experience, you don’t have to actually allow them to make charges. Whether they use the card or not, your positive (and negative) account history will be reflected on their credit.
Some parents opt to add a child as an authorized user for credit-building reasons alone. In that case, the parent holds on to the physical card, not the child.
If you do give your kids a card to use on your account, it’s a good idea to set expectations on how much they can charge to the account and how they plan to pay it off. Some card issuers allow you to set spending limits on authorized user cards.
Remember, when you add an authorized user, you agree to be held responsible for all of the charges that person makes on your account. You can’t dispute a charge if your authorized user makes purchases you didn’t approve.
There’s no such thing as the perfect age to become an authorized user. Ultimately, it boils down to responsibility and whether your child needs access to credit soon.
When you’re deciding the best age to add your child as an authorized user to your credit card, here are a few questions to consider:
Generally, high school is a good age. It’s a time when your kids may need to use a credit card for purchases, and they should be mature enough to pick up lessons in credit. Having credit history could be handy once they hit college age and get their own student credit cards.
Certain credit card issuers have restrictions when it comes to the age of authorized users. American Express, for example, requires children to be 13 years old before you can add them as authorized users to your credit card. Other card issuers, like Capital One, leave the age of authorized users up to the primary cardholder’s discretion.
Boosting your children’s credit history isn’t the only potential benefit to adding them as authorized users. You could earn more rewards and make accessing money easier for your family.
Rewards. If you add an authorized user to a rewards card and give that person charging privileges, those purchases could help you rack up a higher rewards balance. Weaver says, “Beneficially, the primary account holder earns rewards (if on a rewards card) for their authorized user’s purchases.”
Simplified household finances. A shared credit card, where you can see all transactions in one billing statement, could be easier than tracking expenses in a separate bank account or giving your child an allowance that isn’t tracked. Seeing your child’s charges gives you an opportunity to talk about budgeting and how he or she spends money.
Peace of mind. Knowing that your child has access to funds in an emergency can set you at ease as a parent. Just be sure to discuss any spending guidelines together in advance. You should also feel confident that your child is trustworthy and will follow the rules.
Adding your kids as authorized users can help them, but it’s just one stop on their journey to establishing good credit. It’s not the end goal.
Although a positive authorized user account might help your child’s credit scores, that may not be enough when it’s time to apply for certain loans. “When you don’t have your own credit established,” Harris says, “it can still negatively affect you in the lender’s eyes.”
“Don’t just ride on the coattails of someone who has good credit,” says Harris. Kids need to start working toward their own.
Some parents opt to remove their children as authorized users once they’ve established some credit of their own. But keep in mind, removing authorized users may lower their credit scores because they’ll no longer have your account payment history and credit age on their report. As an alternative, you might have your kids stop making charges but keep them on the account as authorized users for credit-building purposes.
Be sure you trust your child if you decide to go this route. If you worry your child might continue making purchases without permission, it’s probably best to call your card issuer and cut the cord.