A generous octogenarian added his domestic helper as an authorized user on his credit card account so she could buy supplies for him and food for her family. “She, in turn, shopped him into the poor house, buying clothes, furniture and jewelry that neither of them can pay off,” says William J. Rose II, a Santa Monica attorney who specializes in credit collection cases and is representing the man. “But he’s the one in the line of fire.”
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Rose’s client is not alone in his difficulties with sharing a credit card account. Rose says lawsuits involving authorized users and joint account holders are common. And because the Credit CARD Act prohibits people under 21, or anyone unable to establish the ability to pay, from opening a credit card account without a co-signer, more consumers will rely on authorized user status or joint account status to obtain credit, says Guarav Gupta, director of consumer lending and risk at Novantas, a consulting firm for the financial services industry. Here’s what you need to know before you share a credit card account.
Authorized users vs. joint account holders
There are two ways to share a credit card account with another person: You can be an authorized user or a joint account holder. The liability for the payments differs greatly.
“Authorized users piggyback on the credit of a friend or relative,” says Cate Williams, vice president of financial literacy for Money Management International, a nonprofit credit-counseling agency. These users are entitled to use the credit extended to the card holder, but have no legal responsibility to pay the bill.
Joint account holders, on the other hand, actually share ownership of the account and both are liable for repaying the debt. A joint account must be opened by the account holders at the same time. “It’s literally like a joint liability account,” Gupta says. “The advantage is that both credit histories get updated, and both account holders are legally responsible for the debt.”
When it works
Getting added as an authorized user on a friend’s or family member’s account may seem like a no-lose situation. Credit is extended freely, and payment is someone else’s responsibility. In some cases, authorized users with limited or bad credit are able to use that status to build their own credit, as the credit history of the account owner can be reported on the authorized user’s credit report. (If you’re an authorized user, check with the credit bureaus to be sure the card is being reported on your credit report.)
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For years, parents have added their teens as authorized users, helping their offspring establish credit while still maintaining control over the spending. “This can be a great way to teach children how to be financially responsible and how to use credit wisely,” Williams says.
In some cases, account holders can even set spending limits for each authorized user on the account, Gupta says.
However, if the account owner has a problem that results in a negative credit item being reported, the authorized user’s credit also may be negatively affected. “Usually, authorized users have no idea what’s going on and, while they aren’t responsible for the debt and can’t even take their names off the account on their own, they could get hit with the negative trade line on their own credit report and get a lower credit score,” Williams says.
And even though authorized users are not technically responsible for debt repayment, “lawsuits have been maintained against AUs for expenditures run up not by them but by the card owners who defaulted,” Rose says. “Once a lawsuit is filed, if the AU fails to answer a summons or effectively defend against the charges, they find themselves stuck with a judgment for charges they never incurred. Since anywhere from 60 percent to 80 percent of credit card lawsuits end in default judgment, one assumes this is not an infrequent occurrence.”
When it doesn’t work
For joint account holders, the advantage is sharing financial responsibility and helping one card holder qualify for the credit they desire, says Wayne Sanford of New Start Financial Corp. Generally, holding a joint credit card account is a good way for couples to manage household expenses, and both parties are legally responsible for the debt.
However, that shared responsibility can also be the “down side” of a joint account, Gupta says. “In case the relationship (between the two account holders) sours, there’s a great chance for disagreement,” he says. “The other person could intentionally spend (to increase the balance out of spite).”
In the case of a divorce, even if the legal proceedings specify which spouse is responsible for outstanding credit card debt, “card issuers, or collectors working on their behalf, are not bound by this,” says Fred Williams, author of “Fight Back Against Unfair Debt Collection Practices.”
“They can try to collect from either or both spouses who were (account holders). This is because the contract governing the account is still in force and is not modified by the divorce proceeding.”
The bottom line is that linking your credit with another person’s credit always has the potential for risks and rewards. “Only add authorized users or (become) joint account holders who you trust to make payments and who will not abuse the credit card account,” Williams says.