I had a few conversations with a friend who decided to add a loved one to his credit card as an authorized user. Over the years, we had many discussions about some of the challenges he faced building his credit history as an immigrant with a thin credit file. He had been a joint account holder in previous situations, and now he was in a position to help someone else. Like my friend, I have been a primary account holder, joint account holder, and an authorized user, which lead me down this path to talk more to colleagues, do research, and write about piggybacking credit.

According to a 2010 report from the Federal Reserve, “piggybacking occurs when an individual becomes an authorized user on an account for the sole purpose of improving that person’s credit history.”  In other words, an authorized user is someone who is added to someone else’s credit card.  The primary cardholder is responsible for the account (Nerdwallet). The authorized user is a secondary cardholder, has permission to make purchases, access to an account, but is not an owner or liable for its balance. The authorized user’s purchases go to the same account and show up on one credit card statement. 

Sometimes, parents are interested in helping their children to develop healthy money habits and establish credit early. In these cases, they might add a child as an authorized user. The parent can decide how and when the child uses the card by setting spending limits. Credit card companies have different minimum age requirements (e.g., no minimum, 13, 15, or 16 years old), so be sure to check with your creditor.

Both the primary and the authorized user have responsibilities, benefits, and drawbacks from this arrangement:

The primary cardholder

• Adds the authorized user
• Vets the cardholder – make sure it is someone trustworthy
• Helps someone build credit and can earn more rewards on purchases by the authorized user
• Liable for payments and charges. Can create a spending limit for the additional user
• Monitors the account activities
• Credit history is affected by usage and payments. Missed payments or high credit utilization can negatively affect credit history
• Can call issuer or log in online to remove authorized users from the account if necessary – does not harm credit

The authorized user

• Provide personal information (e.g., name address, DOB, SSN) to the card issuer
• Vets the cardholder – make sure it is someone trustworthy with excellent payment history, low credit utilization (e.g., below 30 percent)
• Confirm with the cardholder that the issuer reports to the main bureaus (Transunion, Equifax, and Experian)
• Cannot increase credit limit or add more authorized users. Can monitor individual account page
• Cardholder’s payment history will show up on the user’s credit reports if the card reports to the bureaus
• Missed payments or high credit utilization negatively affects credit history
• Remove self from the account if necessary. It can slightly harm credit if removing an account in good standing with a high credit limit and low balance. It could have a moderately positive effect if the account had a high card balance and you are removed from that amount 

In addition to person-to-person (e.g., adding a loved one) piggybacking, consumers may come across options from credit repair companies offering to match them with a primary cardholder who has an excellent credit history for a fee. It is essential to be cautious about this type of agreement with for-profit companies. Typically, the company makes a profit from this arrangement, and the primary cardholder gets a percentage of the fee. You also are entrusting a stranger to make crucial decisions on your behalf. Therefore, consider carefully the responsibilities and risks associated with this type of plan. 

Another consideration when trying to understand an authorized user’s role is knowing how it differs from a joint cardholder. Unlike an authorized user, joint cardholders share equal responsibility for the credit account. They apply for the credit together, which means the issuer pulls both of their credit reports. For someone who may have been denied credit applications because of thin credit files and is looking to establish or restore, a joint cardholder agreement may not be possible. Both cardholders decide how and who pays the balance. Similar to the authorized user arrangement, missed payments or misused accounts can negatively affect both cardholders.  Non-payments can lower credit scores and are reported on both credit histories.

There are many nuances to consider when deciding on a cardholder and authorized user relationship. The Federal Reserve report suggests that piggybacking offers substantial potential and can increase the credit scores if the authorized user is added to an account that is high quality. Additionally, the agreement between both people is important and often personal; both parties should decide on spending and repayment structure.  Nevertheless, situations may change (e.g., a breakup, death, mismanagement of responsibilities) and need to be addressed promptly. Stay on top of your credit information and pay attention to the impact on your credit history. Financial educators encourage people to think carefully about this decision before entering into an arrangement.

The consumer economics team as an upcoming podcast on this topic, releasing on May 15, 2021. To learn more about the Family Financial Feuds podcast, please listen on Sound Cloud.  

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