Editor’s note: This is the first installment of a semi-monthly Q&A on credit and credit cards by Sean McQuay, credit cards expert at NerdWallet, a personal finance website. McQuay will answer readers’ questions about credit card terms, credit scoring, credit card rewards and consumer debt.
Q: My daughter recently graduated from college and moved to a new city to start her career. We are still helping her financially and are considering adding her to one of our credit cards as an authorized user so she can make purchases. What issues should we consider? She is a responsible person, but we are concerned about unexpected consequences.
A: Adding your daughter as an authorized user to one of your credit cards can do a lot of good, but you’re right to be concerned. It’s not a move you should take lightly.
If all goes according to plan, you could give your daughter the freedom to make purchases on her own while helping her establish a strong credit history. But if she routinely overspends, you’ll be stuck with the charges. Issuers hold primary cardholders — not authorized users — liable for purchases, and the credit card bill will go to you, not her.
Even though you trust your daughter’s judgment, some risk is involved, so it’s wise to set clear ground rules. As long as you’re both on the same page and she exercises self-control, adding her as an authorized user could benefit both of you in these ways:
- You can financially support your daughter without mailing checks, signing up for a peer-to-peer payment service or paying your bank’s electronic transfer fees. If you and your daughter have different banks, the cost of transferring funds to her every month can add up in terms of both money and time.
- It can help your daughter build a credit history. Many issuers report authorized user accounts to the credit bureaus. By adding your daughter to a card you’ve consistently paid off on time and haven’t overspent on, you could help your daughter build her credit from scratch or improve the credit she already has. You or your daughter also have the option of canceling her authorized user account if you want it to stop affecting her credit scores.
- You can earn extra rewards. By adding your daughter to a rewards credit card, you can earn points or miles on every purchase she makes, which could help fund her trips home for the holidays.
As you establish those ground rules, I strongly advise giving your daughter a monthly spending limit — say, $300 per month. Some issuers can help make such an agreement more formal. American Express, for example, lets you set a separate credit limit for each authorized user. If your issuer doesn’t offer that option, try to reach agreement with her on spending limits you can afford — in writing so there are no misunderstandings — before sending her a card.
In my view, the parents who are most successful in helping their kids learn the ropes of credit cards are those who have established clear consequences for going over their limits. So have a talk with your daughter about what will happen if she overspends. Consequences might include getting a lower limit for the following month, paying back the difference within a set time frame or losing account access entirely.
Remember, if your daughter charges too much on the card, it could hurt more than just your budget. It could also increase your credit utilization ratio, the amount of available credit you use, dinging both your credit and your daughter’s credit. That’s why it’s important to discuss any spending problems as they arise and find ways to avoid them in the future. Unlike your daughter, you’re stuck with that card history, negative or positive, for up to 10 years after closing the card. And if you’re clear about your expectations, chances are things will work out more smoothly and you’ll be able to avoid disagreements down the road.
Most important, remind both yourself and your daughter that you’re only helping her start her credit-building efforts. She needs to understand why a strong credit history is so important and take ownership of her personal credit profile. Helping her financially, even early in her career, is generous, but it’s not something you can do indefinitely. As your daughter’s income increases and her credit improves, she’ll soon be able to cover her bills with her own cards, on her own terms.
Sean McQuay is a credit cards expert at NerdWallet. A former strategist with Visa, McQuay now helps consumers use their credit cards more effectively. If you have a question about credit, shoot him an email at firstname.lastname@example.org. The answer might show up in a future column.
Photo of Sean McQuay, courtesy of NerdWallet.
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