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Expert Q&A: Add an Authorized User, Get a Bonus?

 
By Eva Norlyk Smith, Ph.D.
September 30, 2011
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QHi Eva,
I received an offer from my credit card company saying that if I added an authorized user to my card, I’d get 3,000 bonus miles, which seems like a lot to me. The problem is, I don’t know who to add since I’m single and don’t have any children. I could add my sister, I guess, but I have no idea how she’d handle the card. What do you think? Are 3,000 extra miles worth it? — Angie

AHi Angie,
Your question is a good example of how our brains work when it comes to earning credit card rewards. Our minds tend to equate big numbers with big money. Yes, 3,000 bonus miles sounds like a great perk.

But let’s take a moment to translate that amount into actual dollar value. The typical redemption value on rewards miles is one cent per mile. So, the bonus offer you are eyeing is worth 3,000 cents (still sounds pretty good) or … $30. That doesn’t sound as hot, does it?

There’s a science to how we perceive numbers, and marketers use it very skillfully. That’s why most prices end in .99, because $9.99 just sounds like a better deal than $10. Ask Eva

When it comes to rewards credit cards, this is useful to keep this in mind. The prospect of rewards earnings or extra bonus rewards when we exceed a certain spending threshold makes many people spend more than they otherwise would.

So, as a basic rule of thumb, do the math before considering any type of rewards offer. Take away the last two digits to get the true dollar value of the rewards earnings and then decide if it’s really worth your while.

When it comes to adding authorized users to your credit card, I subscribe to the old adage: Good fences make good neighbors.

Credit card issuers like to add authorized users on their best cardholders’ accounts because it’s a low risk way of expanding business. However, there are fewer advantages to cardholders — and many disadvantages.

Here are just some of the drawbacks to making someone an authorized user on your credit card:

  • The primary cardholder is responsible for the charges of the authorized user. Typically, authorized users are people that the primary cardholder has reason to believe they can trust, such as family members or a spouse. But life happens. In the case of divorce or if the authorized user falls on economic hardship and fails to pay their share of the bills, the primary cardholder will be left holding the bag.
  • Different money styles can become an issue. The authorized user may carry a balance forward month after month, while you pay your balance in full. Would you be comfortable seeing those balances (and credit card interest charges) get larger each month, knowing that you could ultimately be on the hook for that debt?
  • Your credit score could get lowered. While being added as an authorized user on someone else’s account can help improve the authorized user’s credit, it may hurt the credit score of the primary accountholder. For example, if it means that you will be charging more and/or carrying higher balances on the card, it will affect your credit utilization ratio — an important part of credit scores.

There is one relatively easy fix for these issues: Set a low credit limit on the authorized user’s account. You want to set it so low that balances carried by the other user won’t affect your credit utilization ratio significantly.

The limit should also be low enough that you won’t have any issue paying off the balance should the other person be unable to pay the bill in the future.

Of course, this disadvantages the authorized user, and it could be interpreted as a lack of trust on your side, potentially opening a whole other can of worms.

There are also times when it can be useful to add someone as an authorized user. Here are some instances where it can be very helpful (bearing in mind the cautions listed above):

  • Parents may add a young adult child to help him or her establish a credit history. You can help your child build credit, but still keep a watchful eye on his or her credit usage.
  • Married couples may want to share a credit card for household expenses in order to keep those expenses conveniently collected in one place.
  • Rewards cardholders may add family members as authorized users to meet certain preset spending limits and earn significantly more rewards.
  • Business cardholders may get extra credit cards on the account for employees to help simplify expense accounting.

Given the extra work involved in managing authorized users on credit cards and the potential pitfalls, I think you’ll agree that $30 isn’t worth the hassle.

And quite frankly, with bonus offers on new credit cards ranging as high as $250, you’re much better off simply applying for a new credit card for yourself — as long as it fits into the context of your other financial planning and won’t unduly affect your credit score.


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