While naming your teen as an authorized user on your credit card may sound scary, there are some distinct advantages to this arrangement. But first things first — what exactly are you authorizing, anyway?
What Is an Authorized User?
In the context of your credit card, an authorized user is someone to whom you’ve granted financial access. When you add an authorized user to your account, they get their own credit card with their name on it. However, only the primary cardholder (you) will receive the bill.
Depending on your card issuer, you may have access to account settings that let you limit the amount of money your authorized user can spend each day or each month. Generally speaking, you should also be able to set other stipulations on your authorized user’s account, such as limiting or denying cash advances made with the card.
By adding your teen (or anyone else) as an authorized user, you are taking full responsibility for any purchases they make. In other words, it’s up to you to set the ground rules to make sure everything goes as planned.
Four Reasons to Make Your Teen an Authorized User
While it’s easy to assume that teens and credit cards don’t mix, adding your teen as an authorized user on your account comes with benefits:
It’s a matter of convenience
Teen social lives are more active than ever, which means the need for pocket money is real. If you forget to give your teen money for a bus ride home, a quick bite to eat between sporting events or practices, or a movie with their friends, they can use their authorized user card to pick up the tab.
It can help them build credit
Once your teen is an authorized user, your card issuer will begin reporting your credit details to the three credit reporting agencies — Experian, Equifax, and TransUnion. Furthermore, because of the Credit CARD Act of 2009, adults under the age of 21 may not qualify for a credit card without a co-signer or proof of income. By making your teen an authorized user early on, you can let them build credit they couldn’t build on their own.
While it’s convenient for your teen to have money for necessities, it’s important for them to have access to emergency money as well. If your teen goes out of town for a school field trip, gets a flat tire on the side of the road, or gets stuck in an uncomfortable situation, it would be nice to know they have access to emergency credit if they need it.
Teens can learn how to use credit responsibly
Teens who haven’t had access to credit in the past may be in for a rude awakening once they come of age and apply for their own cards. If they have no idea how credit works — or how easy it is to rack up a huge balance — they could be in for a world of hurt.
Letting your teen ease into using credit as an authorized user, on the other hand, with your watchful guidance, allows them to learn about credit in a relatively safe, low-risk environment.
What to Watch Out For
While adding your teen as an authorized user can make a lot of sense, you should still tread carefully. Here are some factors to consider as you ponder this move:
- All liability is yours: When you add an authorized user to your credit card, you take all liability for their purchases — whether they were authorized by you or not.
- Potential credit damage: If your teen gets out of hand and runs up a balance you cannot repay, any late or delinquent payments will go on both of your credit reports. That’s why it’s a smart move to put a cap on how much they’re allowed to charge, or use a card with a lower credit limit.
- Possible drama: Dealing with teens isn’t always easy, and helping them learn about credit may present a challenge. If your teen has trouble with spending limits, uses their credit without your permission, or is otherwise unreliable, you can expect some bumps along the road.
While these disadvantages are real, the easiest way to avoid a sticky situation is to set account limits on how much your teen can spend — and when. By adding these limits, you can save yourself the headache of finding out that your teen overspent, set boundaries that your teen must learn to live with.
The Bottom Line
Adding your teen as an authorized user is a great way to teach them credit basics — and allow them to start building credit. As they grow up, both of these things will become increasingly important. Meanwhile, your “hand up” could actually give them a leg up when they are old enough to get their own unsecured line of credit, finance a new car, or buy their first home.
The key to making the situation work is setting limits and sticking to them. Furthermore, talking with your teen about credit along the way can help them adopt the right credit mindset.
Would you ever add your teen as an authorized user? Why or why not?