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Co-borrowers and their effects on your credit rating

Co-borrowers, does their usage affect their credit, mine, or both?

My credit card company offers the option of issuing a second card for a child, partner, significant other, etc... does their usage affect their credit, mine, or both?

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Thanks for visiting Bills.com. The question you pose arises frequently in American homes; however, the vast majority of Americans are totally unaware of the potential consequences of requesting extra credit cards for their children, spouses, and others.

The credit card companies call anyone for whom you request an extra card an "authorized user". In almost all cases, authorized users are not legally responsible for paying charges incurred on the credit card, because they never signed a credit contract. Only the "cardholder," the person who actually signed the credit card contract, can be held legally liable and sued by the issuer for default on the debt. However, an authorized user's credit report can be (and very likely will be) negatively affected by the default. Card activity, including negative activity such as late or missed payments, will be reported by the bank and will appear on the authorized user's credit report as well as that of the original debtor, whether or not the authorized user actually used the card or even knew about his/her status as an authorized user.

In general, when Congress enacts any statute, a federal agency, usually already in existence, is named to enforce the statute and issue regulations addressing the details and future real-world situations arising under the subject of the statute, but not necessarily contemplated by Congress when it originally passed the law. Under this scheme, the Federal Reserve was appointed to author and promulgate regulations relating the Equal Credit Opportunity Act of 1974 (15 U.S.C. 1601 et seq.). This act was a well meaning piece of legislation, the purpose of which was to help stay-at-home wives obtain credit.

Before the passage of the act, the extension of credit to stay-at-home wives was rare. This situation was problematic in the case of a divorce or a husband's death; these women were left unable to obtain the credit necessary to maintain their households. To help these women establish credit independent of their husbands, the ECOA required that creditors report all accounts on which a husband was the primary cardholder, and on which his wife was an authorized user, on both the husband's and wife's credit reports. Presumably under pressure from issuing banks, the Federal Reserve issued regulations stating that the issuing bank may, at its option, report account activity on the credit reports of both the cardholder and all authorized users, not just a spouse. Since issuing banks are now allowed to exert pressure "at its option" for payment after default on a whole new class of people, even if those people are not legally obligated to pay the debt, it is a safe bet that the banks have and will continue to take advantage of their "option."

If you have a good reason to request duplicate cards for, say, your kids who are moving across country for school, ask the bank its policy on credit reporting on authorized users; most banks do report on all authorized users, but you may be able to find one that does not. Otherwise, just assume that the bank will report and avoid the potential hassle.

Also you should bear in mind that if an account is kept in good standing, it may improve the authorized user's credit score, which is a good way to help a relative without a credit history establish one. However, if life circumstances make you unable to pay your credit cards, or force you to file bankruptcy, the people whom you added as authorized users could suffer as a result. The bottom line is this: if you want to add someone as an authorized user, make sure both you and he or she understand the potential benefits and pitfalls so you can both make an informed decision.

Best of luck, we hope that this helped you to Find, Learn, and Save!

Best,

Bill

www.bills.com

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