In today’s marketplace, a good credit rating is essential. But how is it possible to get a good credit rating, if you are new to the marketplace and haven’t had a chance to earn it yet?
In other words, how can parents help their children establish themselves with good credit as they turn 18? Adding them to your existing credit card while they are still living at home can help kids learn about responsible credit management and also begin to build their credit score before they leave the house.
Why credit scores matter
Your credit score is a three-digit number that represents your creditworthiness to lenders. It affects your ability to get loans, rent an apartment and even secure certain jobs. A good credit score can save you thousands of dollars in interest payments over the life of a loan, and can get you a better insurance rate. A strong credit history opens doors while a poor one can hold you back. You can check your credit score for free on websites like AnnualCreditReport.com, CreditKarma.com or CreditSesame.com.
The benefits of adding an authorized user
Adding someone as an authorized user involves adding a family member to your existing credit card account. This allows them to benefit from your positive credit history. Adding someone as an authorized user provides some key advantages, including:
- Jumpstarts credit history: For young adults or those with limited credit adding them as a co-signer can quickly establish a credit history.
- Improves credit score: As the co-signer uses the card responsibly their payment behavior is reported to credit bureaus helping to build their credit score.
- Financial education: Co-signing provides an opportunity to teach family members about responsible credit card usage, budgeting and the importance of timely payments.
How to use credit responsibly
While adding an authorized user can be beneficial, it is important to approach it with caution. The biggest concern is that if you make someone an authorized user, you are liable for any charges they place on your account, and if you are relying on them to pay the credit card company directly, you are putting your own credit at risk if they fail to timely pay the bills. Thus, use caution and only take this step if you are 100% certain that they will not abuse the privilege. Here are some tips to ensure a smooth process:
- Take advantage of alerts and spending limits: Some credit card companies will send a notification when spending on the additional card reaches a specified amount. On some cards, you can also set a maximum spending limit for each billing cycle.
- Open a secondary card: Consider opening a secondary credit card with a lower credit limit for the authorized user. This reduces the risk of overspending and potential debt. This would be instead of having them as an authorized user on your primary card, but would rather entail you co-signing an account with them. This would provide a more limited credit boost.
- Discuss expectations: Have an open conversation with the authorized user about responsible spending habits the importance of paying on time and the consequences of missed payments.
- Monitor the account: Regularly review the credit card statements and track the authorized user’s spending. This helps you stay informed and address any issues promptly.
Adding an authorized user: Important considerations
It is important to remember that as the main account holder you are ultimately responsible for the card’s balance. The authorized user’s actions directly impact your own credit score. If they fail to make payments it will negatively affect your credit rating. Before adding someone to your account, understand the implications of adding them and ensure that you trust them completely to honor their obligations. Also, be aware that if the authorized user mismanages the card it could strain your relationship and lead to financial difficulties. If you ever have concerns about credit card billing errors or fraudulent charges, an experienced consumer protection attorney can help.
Adding someone as an authorized user to your credit card can be a generous way to help a loved one build credit. By understanding the benefits risks and responsible practices you can make an informed decision that benefits everyone involved.