If you are sharing a loan with another person, the status of your account is just as important as the credit line and interest rate.
This is because it determines the extent to which you have control over the account, your responsibility for the account, and its effect on your credit history.
Unless you opened the account alone (which makes you the primary account holder), your status with shared accounts will likely fall into one of three categories: shared account holder, authorized user, or co-signer.
Here’s what you need to know about the different access and responsibilities associated with each account status.
What does it mean to be a joint account holder?
The label “simply means that the two parties can apply for the card together,” said Mike McLane, senior compliance advisor for the National Association of Credit Unions.
When joint account holders open an account, each of them fills out applications and their creditworthiness is checked. They have equal access to a line of credit or credit, and each is personally responsible for all debt.
The owner of the joint account has all the rights and obligations of the owner of the main account. You will have your own card and full access to your account information. You can request an increase or decrease in the line of credit. You can also close the account. And, if the issuer reports to the credit bureaus, they must include this account in the credit reports of all joint account holders.
Each account holder is also fully responsible for the entire debt, not just their own expenses or 50 percent of the total, McLain said.
Termination of your relationship with the owner of your joint account does not remove your responsibility for the account. Even if a divorce court or mediation agreement transfers a card or card debt to a former partner, this does not change your original agreement with the card issuer.
“Your divorce judgment does not bind the issuer of the loan,” said Chi Chi Wu, a staff lawyer at the National Consumer Advocacy Center. You will need to take action to remove anyone from your joint credit card account.
What does it mean to be an authorized user?
Authorized users may use a credit card, but they will not receive bills and will not have any control over the account. They cannot request credit line changes or add other authorized users. Generally, authorized users can request to be removed from their credit card accounts by contacting the issuer.
The master account holder is responsible for paying the balance and can see all card spending, so they can see how much an authorized user spent and when and where they made purchases.
For the most part, authorized users are not accountable. But under certain circumstances, they can be held accountable for their own accusations.
“If it’s something they suffered, there may be state laws that make them liable,” Wu said.
This account status is common among family members. Parents can make their children Authorized Users to give them access to a credit card in case of an emergency or help them build a credit history.
Many issuers include authorized users in credit bureau account usage reports, said Nessa Feddis, senior vice president and advisor to the American Bankers Association.
If the account is paid on time and well managed, it will help the authorized user to build a healthy credit history and credit score.
“The problem is that if the main user is a big risk, it can hurt the authorized user,” Feddis said.
What does it mean to be a co-borrower?
The guarantor has no control over the account, but is responsible for paying the balance if the account holder fails to pay.
While many card issuers do not allow guarantors, those that do may require a guarantor if the applicant does not have sufficient income to qualify for a line of credit.
Once you have become a co-signer, it is almost impossible to reverse the decision. You will most likely be the co-signer of the account until the primary cardholder closes it and pays the balance in full. This even applies to accounts you open for a child.
“The guarantors may not realize that once you sign up for a credit card, you remain a guarantor even after that person turns 21,” Wu said.
The decision to sign a contract with someone is not easy to make. Every situation is different. But if a bank or lender decides that the applicant poses a high enough risk that they cannot qualify for a loan on their own, this should give any guarantor serious thought.
Since you will not be in control of the account, but will still be responsible for the balance, this can put your finances and credit score at risk.
bottom line
If you want to help someone learn how to manage credit and create a story, consider making them an authorized user or joint account owner instead of a joint signature. This way you can track their spending habits and keep some account control.
And if you have bad or limited credit, these options can help you build a credit history. But you will need someone with a good credit history and responsible spending habits who is willing to help you. Otherwise, it might be better to consider other ways to build credit.
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