Sharing a credit card carries risk
The new CARD Act that passed back in February makes it tougher for college students to get credit cards which, in general, is a good thing. The drawback is that young adults may have a tougher time establishing credit in order to do things like get a car loan or rent an apartment once they’re out on their own. This is one of many situations where a well-meaning person might consider adding a family member onto one of their credit card accounts, but doing so can be risky, as this article points out.
“There’s always risk when someone else is involved, simply because the other party could twist off and go on a spending spree,” says Gail Cunningham, vice president of public relations at the National Foundation of Credit Counseling. That said, Cunningham told WalletPop, there are situations where a shared-card arrangement might help a consumer.
There are two types of shared cards: joint accounts, and accounts that have a primary user with an added authorized user. Of the two, the latter is riskier for the primary cardholder because the authorized user has full freedom to run up the bills but no legal obligation to pay for any of them.
Although some card issuers will let you set spending limits for the authorized user, it still might not be a good idea to extend this courtesy to a profligate spender. If you’re a parent adding an adult child as an authorized user to help them build their credit, both of you should check with the credit bureaus to make sure that their authorized-user status is documented, Cunningham says.
A joint account, on the other hand, makes both parties liable for the charges incurred. Cunningham says people who apply for cards jointly often do so because their combined incomes may make them eligible for a higher credit limit. This arrangement is more typical between spouses than between parents and children, but either arrangement can get tricky if the people involved become estranged. One could go out and — legally — make some big-ticket purchases that both would be required to pay off.
In either case, our best advice is, don’t share a credit card with someone if your own credit isn’t in the good-to-excellent range.
“The primary party could become financially distressed and not be able to make the payment, thus negatively impacting both credit files,” Cunningham explains. This could have the unanticipated effect of pulling down the credit score of the person to whom you were trying to give a boost.