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Dear Credible Money Coach,
I have a very good credit rating and an average debt ratio. I want to help my son and daughter with their credit scores. They are both young and have little or no credit. My son, however, defaulted on a lease and was sent to collections. This debt has now been repaid, but its credit rating is very low. With my good credit history and paying on time, if I add him as an authorized user on a credit card and slowly pay him off over six months, will that help his credit score to increase ? Conversely, will his bad credit rating lower mine? Is this something you would suggest or avoid? —Dania
Hello Dania and thank you for your question. Yes — adding your son to your credit card as an authorized user could help improve his credit rating. But there are caveats to keep in mind.
The most important thing is that if you both use the credit card and you don’t know who will pay the monthly bill, you could end up with more debt than expected. And if that debt makes it difficult to pay your bills, your son’s credit rating and yours could be negatively affected.
How Being an Authorized User Can Boost Credit
Generally, anyone can become an authorized user on someone else’s credit card. Some credit card companies set minimum age requirements for authorized users, but they generally do not check the authorized user’s credit.
If you add your son as an authorized user, the card issuer will send him his own card which will be charged to your account. They will have access to the card’s full credit limit, unless the card issuer allows you to set limits for them – some do.
As long as you continue to pay the bill on time and your debt-to-income ratio is low, this positive track record could help improve your son’s credit rating. Here’s how:
- A new credit account will appear on its credit report, and it will show your past positive history on the account.
- If you’ve had the card for a number of years, it will improve the length of credit history on your son’s account – one of the many factors that determine credit scores.
- When the card issuer reports payment activity on the card to the credit bureaus, the information will appear on your and your son’s credit reports.
Although the card issuer does not track who is responsible for spending on the card, it is a good idea for you and your son to agree on how he will use the card and pay for purchases. he will do with it.
Potential Downsides of Authorized Users
Simply adding your son to your credit card as an authorized user will not negatively affect your credit. Your credit ratings are always distinct and his actions before becoming an authorized user cannot harm your credit score.
But their actions after becoming an authorized user on your card can affect your credit in several ways:
- If he makes charges that push your balance toward your credit limit, your debt-to-equity ratio will suffer.
- If you agree to them paying the charges they make and they don’t, your payment history will be affected.
- As the cardholder, you are ultimately responsible for payments. If you don’t pay on time each month, your credit and his could be negatively affected.
Some credit creation alternatives
Congratulations to you, Dania, and your son, for taking steps to improve his credit. Being an authorized user on someone’s credit card is a big responsibility, and it’s not for everyone.
If you decide together that this is not the path you want to take, here are some other ways your son can build his credit:
- Ask for a secured credit card. With this type of credit card, your son would make an initial deposit with the card issuer as collateral. This amount would be his credit limit, and when he uses the card, he will draw on this balance. As long as it makes payments on time — and assuming the card issuer reports payment history to the credit bureaus — it can be a safer way to build credit.
- Look for a credit builder loan. These loans are usually for small amounts of $1,000 or less. If your son is approved for a credit builder loan, the lender will deposit the loan funds into a locked account. Your son will then make payments on the loan, which will include interest and likely fees, over the life of the loan, usually six to 24 months. The lender reports these payments to the credit bureaus. At the end of the payment period, the lender will return the funds, possibly with interest, to your son to use. People with no existing credit who use credit-building loans can improve their chances of having a credit score of 24%, a Consumer Financial Protection Bureau Report found.
- Get credit to make payments without credit. Some credit reporting agencies will accept payment information for utilities, rent, and cell phone bills and incorporate this positive history into your credit score.
Dania, the most important thing you can do to help your son build his credit rating is to continue practicing good credit behaviors, including paying all your bills on time and maintaining a low debt-to- revenue.
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About the Author: Dan Roccato is a clinical professor of finance at the University of San Diego School of Business, personal finance expert Credible Money Coach, published author and entrepreneur. He has held senior positions at Merrill Lynch and Morgan Stanley. He is a recognized expert in personal finance, global securities services and corporate stock options. You can find it on LinkedIn.