Sharing credit can help your loved ones improve their borrowing history – but it’s important to understand the implications.
Our current credit system makes it tough to borrow with a weak credit history. If you have strong credit, you can “share” it with your loved ones by cosigning a loan or adding an authorized user to a credit card. This can help them access or build credit of their own, but it’s important to understand the potential risks and benefits.
There are two common reasons for sharing credit. Your loved one may have no credit history because they’re young or have never borrowed, or they have a negative credit history. In both cases, it’s harder to get approved for new credit – and harder to build credit as a result.
When you share credit, you offer your “creditworthiness” as collateral to help offset lender risk. You can do this by becoming a cosigner or adding an authorized user to a credit account.
As a cosigner, you “guarantee” someone else’s loan or credit card debt, meaning you share equal responsibility for its repayment. This can help your loved ones access credit products they might not qualify for otherwise. It doesn’t guarantee your loved one will be approved, but it can substantially improve their chances.
When you cosign a loan or credit card, the line account will show up on your personal credit report. If the primary borrower fails to pay, you’re on the hook for its repayment – and you’ll both take a hit to your credit it goes delinquent.
An authorized user is someone other than an primary account holder who is allowed to use a credit card. When you add an authorized user, the account will show up on their credit report. If the card remains in good standing, it can help improve the authorized user’s credit score.
Credit card card companies generally do not require a credit check before you add an authorized user. You also don’t have to give an authorized user a card of their own, which makes it a relatively low-risk way for your responsible credit use to rub off on someone else.
Simply adding someone as an authorized user won’t hurt your credit. But if you give them a card of their own, and they use it unwisely, you’re on the hook for their spending. Just like any other credit card, missing payments, paying late, or maxing out your credit limit can hurt both your credit scores.
When you remove an authorized user, the account will no longer show up on their credit report.
How much this will impact their credit score depends on the account and their personal credit history. If you’ve had the card a long time, it can reduce their overall credit age. If your card has a high credit limit compared to their other accounts, it can also increase their credit utilization rate. Both are important credit factors and could cause their score to drop.
Before you remove an authorized user, review their credit situation and financial goals to determine which actions you can take (ex: apply for a loan, pay down other balances) to disrupt their credit least.
If you’re an authorized user on someone else’s account, you may eventually want to cut ties. Perhaps you’ve ended a relationship, or the account is no longer beneficial to your credit score. In most cases, you can remove yourself by filing a direct request with the bank or credit card company.
Some lenders, however, require the primary cardholder to remove an authorized user. If the primary cardholder is unable or unwilling to make a request on your behalf, you can file a dispute with the national credit bureaus to get the account removed from your credit report.
Whether you or a loved one wants to build their credit score, sharing credit isn’t your only option. Innovative tools like StellarFi help folks build credit with their existing expenses. Unlike a secured card, there’s no credit check or security deposit.
Getting started is simple – just link monthly bills like your rent, car insurance, and even your Netflix subscription. StellarFi pays reports all your linked payments to the credit bureaus.
StellarFi is on a mission to create financial equity for all. A public benefit corporation, we help override the drivers of cyclical poverty and wealth inequality by providing universal access to good credit and financial solutions.
The bills you pay should pay you back – get started with StellarFi today.
The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.