Understanding Authorized Users on Credit Cards
Building a Credit Profile
Establishing a credit history from scratch can be challenging. Lenders rely on credit scores (such as CIBIL in India) to evaluate risk, but if you have no history, generating a score is difficult. One method sometimes used to help establish a credit footprint is becoming an authorized user or an "add-on" cardholder on someone else's credit card account.
How Add-On Cards Work
If a family member (like a parent or spouse) has a credit card, they can often request the bank to issue an add-on card in your name, linked to their primary account. As an add-on cardholder, you can make purchases using the card, but the primary account holder remains legally responsible for paying the bill.
The Potential Impact on Credit Scores
In some credit scoring models, being listed as an authorized user can result in the primary card's payment history and credit utilization being reported on your personal credit file.
If the primary cardholder has a long history of on-time payments and maintains a low credit utilization ratio, this positive data might help bolster your own credit profile. For example, if the primary card has a high limit and low balance, it could potentially improve the overall utilization ratio reported on your file.
The Risks Involved
While this strategy can be beneficial, it requires caution and trust, as the impact can go both ways:
- Negative Reporting: If the primary cardholder misses a payment or maxes out the credit card, that negative activity may also appear on your credit report, potentially damaging your score.
- Financial Responsibility: While the add-on user isn't typically legally liable to the bank for the debt, poor spending habits by the add-on user can create financial strain and relationship issues with the primary cardholder.
It is important to note that the way add-on cards are reported to credit bureaus can vary by bank and by the specific credit bureau in India. Some bureaus may weigh authorized user accounts differently than primary accounts.
Disclaimer: Credit reporting practices vary by institution. The information provided is for educational purposes and should not be considered financial advice.