While everyone is responsible for his or her own credit history and for paying his or her debts, sometimes your credit becomes linked to someone else’s credit. Joint accounts are often used between parents and children, spouses, and other family members. As with most financial decisions, sharing a credit account has some benefits, but it can also open you up to a big risk.
Let’s run though some types of shared accounts, how you should be using these accounts to get the most benefit, and how to protect your credit history if you do.
Establish Credit by Cosigning a Loan
You’ll hear the term “cosign” when someone with a less-established credit history needs someone with a more-established credit history to help get a loan. The lender doesn’t want to lend money to someone with a higher risk so looks for a cosigner to shoulder some of the risk.
A cosigner is the person responsible for repaying a debt if the borrower defaults. In essence, a cosigner guarantees repayment of the loan. We often see parents cosigning loans for children to help get their credit established.
Before you cosign a loan, be sure you can afford to repay the debt. If the primary borrower does not pay, you may have to pay up to the full amount of the debt, including late fees or collection costs.
It’s important to cosign only for someone you can trust to pay the bill on time, because late payments will probably appear on both borrowers’ credit reports. Always ask the creditor to agree to notify you if the primary borrower misses a payment. This will give you an opportunity to address the situation or make back payments without having to repay the entire debt immediately. You should secure this agreement in writing.
Beyond the impact of late payments, your credit score can be affected in other ways by cosigning for a loan. If your name is on a loan, it will potentially show up on your credit report and affect your debt-to-income ratio.
Establish Credit by Adding an Authorized User
A primary account holder can add an authorized user to an account. We usually see this on credit card accounts. Typically, an authorized user is allowed to use, or charge to, the account but is not responsible for paying the debt.
These accounts are shared with someone who has a solid credit rating and plenty of income. A parent might add his or her child or another family member to a credit card account to help establish the authorized user’s account. I’ve heard of parents adding a new teenage driver as an authorized user to help pay for gas money.
Do NOT add anyone to your credit account as an authorized user unless you are prepared to be responsible for his or her purchases.
The credit account history of the responsible party is sometimes reported on both credit files. You can contact the credit grantor if you want to have your name permanently removed as an authorized user and the account removed from your credit file.
Establishing Credit by Using Joint Accounts
Joint accounts are more often seen between spouses and partners. Mortgages are a common joint account. Spouses will apply for a mortgage together because their combined credit makes them more likely to get the mortgage.
When you’re sharing credit with someone, you need to remember that you’re both responsible for the debt. Make sure that your joint account holder is able to contribute to the payment and keep the debt current. If one party can’t pay the debt, the joint account holder needs to make sure the bill gets paid, because it will reflect on both credit reports.
But remember that you and your spouse each have your own separate credit file. The consumer reporting agencies maintain credit files on individual U.S. residents only. They do not maintain joint files for spouses. Only accounts that are in both names will show up on both files. Any account for which you are a cosigner will also show up on your file.
Do you have any joint credit accounts? What are your strategies for making sure the payments get made on a cosigned loan?
Check back next week for our post on what to do after a divorce and how to separate your credit from that of your spouse.
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