Sharing Credit and Your Credit Score
Whether you’re looking to help your child, build credit, or simplify you and your spouses finances, sharing credit can be an incredibly helpful tool. However, most of us aren’t entirely aware of the added responsibilities shared credit accounts can bring.
Luckily, I’ve collected the three most common forms of shared accounts and will show you exactly how they can affect your credit score.
Authorized accounts are ideal for parents looking to help their kids develop good credit. An authorized user is essentially someone you’ve given permission to use your credit card. They’re given the opportunity to build credit without any legal responsibility of having to pay back any debt they’ve wracked up. The downside and major risk of the arrangement is that the authorized user’s actions mirror your own. In other words, if they miss a payment, you do too. This can result in adverse effects on your credit score. You can possibly avoid this however by simply checking your monthly statements and tracking your child’s expenses. That way you can ensure they’re using their card wisely.
Joint Account Holder
A joint account is commonly used among spouses who want to share their finances and are willing to have the same credit limit. Joint account holders have more responsibility because, unlike authorized users, they are legally held accountable for any debt they might accrue. Standards for applying to be a joint account holder are stricter as well, due to the fact that the requirements are the same as applying for a credit card alone. One helpful tactic to employ when using a joint account is setting an “approval” limit on large purchases. For example, if you were to set your limit at $500, you and your fellow account holder would have to discuss any purchases you wish to make beyond that threshold beforehand. That way, there aren’t any surprises for either party when the bill comes.
As a cosigner, you are obliging yourself to pay the entire bill should the applicant in question not be able to fulfill their financial responsibilities. Even if the applicant is sick or dies, the responsibility of paying that debt falls on you. As if that weren’t enough, lenders will count any debt accumulated on the card as your own. Because of this, cosigning on someone else’s credit card can be a major risk to your credit. One way you can help alleviate the stress of cosigning though is by requesting duplicate statements to be send to your address. This way you can make sure payments are being made on time.
Its important to remember that sharing credit is a major responsibility and that regardless of how you decide to merge your accounts, your personal credit score is always at risk. That’s why I can’t stress enough how important it is to make sure you understand the terms of conditions of whatever option you choose. Sharing credit is a matter of trust, and its important that both you and whoever you decide to share credit with are both fully aware of the consequences.