What is the difference between an authorized user and a co-signer?
A few terms that credit card customers often confuse: “authorized user” and “co-signer”. They seem interchangeable, but if you plan on sharing your card with someone, knowing the difference can protect your finances and your relationship.
What it means to be an authorized user
Becoming an authorized user essentially means that you have the permission of the primary cardholder to use the credit card. Authorized users have access to the cardholder’s full line of credit and can bill as they please. It’s different from just lending your teenager your credit card to go shopping; in this case, the supermarket may refuse the purchase because the card is not for your child to use. Authorized users are legally “authorized” – the card belongs to them as much as it belongs to the primary cardholder.
For years, parents have enrolled their children as authorized users on their own cards to help children build a positive credit history. It works because the three major credit bureaus – TransUnion, Equifax, and Experian – report authorized user status, and these are factored into most credit scores, although it may not be as heavy as an account that the user is responsible for paying. This means that because you use your credit card responsibly, your authorized users benefit, although maybe slightly.
What it means to be a co-signer
Adding someone as an authorized user means trusting that person to use the card responsibly. But co-sign a credit card for someone increases the stake. This is because the co-signing means that you are essentially vouching for the other person’s purchases. If the person whose plastic you co-signed does not make payments on the card, the bank will look to you for the money. If you fail to make your payments, your credit score will suffer.
Some things to chew on
When considering the difference between an authorized user and a co-signer, it helps to think about the relationship both ways:
If you add someone as an authorized user to your card, you are responsible for paying for the purchases they make. But if you are Authorized User, you will not be required to make payments to the Card if the Primary Cardholder does not, although your credit may take a hit. (You can, however, ask the credit bureaus to stop reporting you as an authorized user.)
If you co-sign a credit card for someone, you are responsible if that person does not make the payments. If someone co-signs a card for you, they agree to take the risk that you don’t pay the bill, leaving them in debt and potentially damaging their credit rating.
Credit splitting can be risky, so when deciding to get started, ask yourself the following questions:
To begin with, how much do I trust this person? Has he had problems overspending or paying bills?
Can I afford to pay off a large credit card balance if the other person becomes irresponsible with the card?
Am I responsible enough to keep someone else’s credit in my hands?
Can the other person get credit without me? Basically, is sharing a credit card with me his only chance to build credit, or are there other options?
Can our relationship withstand the stress that money can bring?
This is important to consider, because sharing your credit card with the wrong person can go wrong.