Each year, countless young adults find themselves in the same Catch-22 style conundrum: They want credit cards so they can build credit, but they can't get approved because they've yet to build credit. It's a tough situation to be in, and while there are ways around it (like opening a secured credit card, which is a good credit-building option for those out in the real world for the first time), many of those who get denied are forced to resort to a tactic that's proved successful over time: getting added to their parents' account.
From an authorized user perspective, this is actually the best of both worlds. Get added to your parents' account, and you'll have access to their line of credit without having to earn that privilege yourself. You'll also get a separate card issued in your name, which means you'll have some autonomy plus the opportunity to build credit yourself. And if you come up short on the things you charge, your parents will ultimately be responsible for the bill.
On the flipside, adding a child as an authorized user may not work out quite as well from a parental perspective. Sure, you might trust your child to use your card responsibly in theory, but you really never know what might happen when he or she experiences the freedom of plastic for the first time. And the last thing you want is to get stuck with a hefty bill or, worse yet, damage your own credit by extending your child that lifeline. If you're thinking of letting your child become an authorized user on your credit card, be sure to consider the dangers of doing so -- carefully -- before making your decision.
The rules surrounding authorized users
Before we go any further, let's clarify one thing: You may want to add your child as an authorized user on your account, but not all credit card issuers offer that option. Of those that do allow this practice, many impose a minimum age. For example, the minimum age to add an authorized user for American Express is 15, and several other major credit cards follow suit.
Once you determine whether you're allowed to add an authorized user to your account, you'll need to see if doing so will result in a fee. Most credit card issuers let you add authorized users free of charge, but certain premium cards impose a fee for that privilege.
Think twice before adding a child to your account
You might think that by adding your child as an authorized user on your credit card, you're doing him or her a major favor. And you'd be right. Once that child is put on your account, any positive payment activity on your part gets added to his or her record. For example, if you pay your bills on time every month, it'll help your child's payment history as well.
But there are drawbacks to adding authorized users, too. For one thing, there's no guarantee that your child won't charge up a storm and leave you to pay the bill. It's been known to happen. Furthermore, if your child puts too many expenses on your account, and you can't pay your bill in full, you're the one who will be on the hook for interest charges.
Having a child abuse your card could also put your credit score at risk. Of the various factors that go into calculating a credit score, your credit utilization ratio is one that carries a lot of weight. This number measures how much of your available credit you're using, and if it exceeds 30%, your score could take a dive.
So, say you have a $10,000 line of credit, of which you need to use $3,000 each month. Let's also say your child charges $5,000 on your account one month, but can't come up with the cash to pay that bill -- and you don't have it, either. At the end of the month, you'll probably manage to pay off the $3,000 you expected to charge, but if you're left with a $5,000 balance, it'll drive your credit utilization ratio up to 50%. And that, in turn, could hurt your score.
Now this isn't to say that you shouldn't add a child as an authorized user on your credit card. Rather, just be aware of the pitfalls involved. If your child needs to go on your card to build credit, consider asking him or her to put down a deposit of sorts. This way, you have some cash reserves to tap if he or she goes on a shopping spree and sticks you with the bill. (Incidentally, this is how secured credit cards work, so the concept is hardly a new one.)
Letting your child become an authorized user on your credit card means helping him or her build credit and get on a financially responsible path. Just be sure you know what you're getting into before making that move.
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