It's the catch-22 of credit for young adults: you can't get a credit card because you don't have any credit, but you can't build enough credit to qualify because you can't get a credit card. It's more difficult for young adults under age 21 to get a credit card on their own since federal law now requires credit card issuers to verify their personal income before granting a credit card.
Young adults, even college students, who don't have enough income can't get approved for a new credit card on their own. However, parents may help their kids avoid this dilemma by adding the child to one of their existing credit cards.
Many credit card issuers allow you to add an authorized user—a person who is authorized to make charges—to your account. The authorized user gets the benefit of the credit card without the legal responsibility of owning a credit card.
Adding an authorized user is different from creating a joint account. With a joint credit card, both parties are equally responsible for any balance on the card.
Why Add Your Child as an Authorized User?
Making your child an authorized user on one of your credit cards gives you the opportunity to teach them about credit and help them begin building a good credit score. At the same time, the child isn't responsible for making credit card payments. That responsibility still falls on you, but you can involve your child in the process and teach them how responsible credit card use affects their credit.
Decide if Your Child Is Ready
Before you make your child an authorized user on your credit card, be sure you're both ready to take that step. Here are some key questions to consider:
- Is your child trustworthy? Having a credit card is a big responsibility. Since you're ultimately on the hook for the purchases made on your credit cards, you have to be able to trust your child to abide by whatever terms you set for the credit card.
- Does your child typically follow rules you've set at home?
- Is your child responsible with money?
Set a Few Guidelines
Before you call to add your child to your card, make sure you set some guidelines for how the credit card should be used.
- How much can your child spend?
- What are they allowed to purchase?
- Should they ask for your permission before making a purchase? Or let you know after they've made the purchase?
- Who's going to make payment? By when?
- How long is the authorized user arrangement going to last?
Discuss the consequences of not following the guidelines, such as removing access for a month or lowering their purchasing limit. Stick to your word. If you say you're going to remove your child's authorized user status because they've charged too much, then it's important to follow through.
Creditors aren't lenient with mistakes, so having guidelines helps you teach your child that there are serious consequences of misusing a credit card.
Choose an Account
It may be better to open a separate account or to add them to a credit card that you seldom use. That way, your transactions aren't mixed together and you can allow your child access to the online account without the concern of them viewing your transactions. Or, if you share a credit card with your child, make sure you leave a buffer of available credit so your child's purchases don't push the balance over the credit limit.
If you decide to add your child to one of your existing credit cards, choose one that has a completely positive credit history. Some credit cards report the entire account history to the authorized user's credit report once they're added to the account. It would be counterproductive to add them to an account that's riddled with late payments and other negative items, as these would be added to your child's credit and hurt rather than help.
Primary and Authorized User Card Responsibilities
Once added to the account, your authorized user will receive a separate credit card in their name. Some credit card issuers even issue different account numbers for authorized users. Even with their own card, the authorized user is simply allowed to make purchases on the account. They typically can't make any other transactions, such as cash advances or balance transfers. Nor can they make changes such as closing the account, requesting a credit limit increase, or adding users.
Keep in mind that you're responsible for all charges made on your card, even those made by an authorized user. Even if the authorized user has verbally agreed to pay for their charges, the credit card issuer generally holds the primary account holder responsible for the balance.
How to Boost Their Credit Score
Credit score boosts from authorized user accounts were almost eliminated when FICO decided it would no longer include authorized user accounts in its credit scoring model. The decision was based on the number of people who had exploited the loophole by purchasing access to authorized user accounts. Eliminating authorized user accounts would have hurt millions of consumers, so FICO instead tweaked its most recent credit score model—FICO 08—to only include legitimate authorized user accounts.
As long as all users on the account are engaging in responsible credit behavior, your child should see a boost to their credit. The VantageScore 3.0 also considers authorized user accounts when calculating a score.
When to End the Authorized User Relationship
Once your child can qualify for credit on their own, there's not really a need to keep them as an authorized user. Once they have built good credit and have their own income, the authorized user setup has served its purpose. Removing your child's authorized user privileges is as simple as making a phone call to your credit card issuer.
Making your child an authorized user is a big financial leap for both you and your child. Arm your child with the right information can help them develop healthy credit and money management habits that will benefit them throughout adulthood.