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Personal Loans

What Is a Loan Agreement and What Does One Look Like?

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If you’re taking out any kind of loan, you should be familiar with the contract that will dictate the terms of that loan. Your loan agreement will tell you about responsibilities and expectations on both the lender side and the borrower side. Here we will focus mainly on agreements for personal loans.

What is a personal loan agreement?

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When taking out any kind of loan, including a personal loan, you’ll have to sign a loan agreement in order for a loan company to disburse the funds to you. This agreement may also be called a promissory note.

The loan agreement is a legal contract that specifies the responsibilities and expectations of both the lender and borrower in the transaction. It’s important to understand the terms and conditions of the loan in order to avoid getting into a precarious financial situation after taking it out.

The importance of these agreements is that they will also be a guide in the case of a breach or violation on either side, said Brian Locker, partner at Fowler St. Clair in Mesa, Ariz. Locker practices civil litigation and regularly represents consumers with claims against lenders and businesses.

“In the event of any conflict between you and the lender during the term of the loan, the resolution will almost certainly be dictated by the terms of that agreement,” Locker said.

For example, there may be steep penalties for missing payments or provisions in an agreement that allow the lender to sue you in court and require you to pay the legal fees in case of default.

These are very serious repercussions, so it’s best to know if you are exposing yourself to these risks before signing your name on the dotted line.

What is a personal loan?

Before signing a loan agreement, you should have full knowledge of the kind of loan you are taking out. One such loan may be a personal loan.

You can get a personal loan from a bank, credit union or online lender. Personal loans can be used for a variety of purposes such as consolidating debt, renovating a home or covering emergency expenses. Some personal loans have stipulations (usually stated in the agreement) on what you can and cannot use the money for.

These types of personal loans are generally unsecured loans. Unlike a home loan or auto loan, these loans are not secured by any type of collateral. These loans are also different from credit cards because you receive a lump sum of borrowed money upfront, and there is a fixed amount of time in which the loan has to be paid off. When dealing with a bank or finance company for a personal loan, you must sign a loan agreement before you receive the money you’re borrowing.

“Personal loan” may also refer to borrowing money from a private party, such as a loan between family members or friends.

How can I get a personal loan?

As mentioned, unsecured personal loans are usually not backed by an asset, meaning the lender may not seize an asset and sell it to recoup the loan amount if you fail to repay it. If you don’t pay back the loan in this case, the lender could lose the money it provided.

To mitigate this risk, personal loan lenders often set strict borrower criteria and qualifications for unsecured loans. Personal loan companies will look closely at your credit score, existing debt obligations and income history during the application process.

Some lenders will allow you to see loan rates you might qualify for by doing a soft pull on your credit report (soft pulls don’t affect your credit). Other lenders may generate a hard inquiry record on your credit report, which could negatively affect your credit score. Make sure you know whether the lender is conducting a soft or hard pull on your credit before you request a rate quote.

Why do you need a loan agreement?

Though the general public can be distrusting of lenders and especially wary of the contracts they’ll sign to borrow money, rest assured that your loan agreement can actually give you rights in the lending process as well.

Rebecca Neale of the Personal Finance Lawyer is a family law attorney whose work often intersects with consumer law issues.

“Just because a loan contract specifies what happens in case of default doesn’t mean that the lender expects you to default,” said Neale. “The purpose is to inform both parties of their responsibilities and liabilities in case of default.”

Loan agreements, in part, make sure banks can lend money affordably. To do so, they must manage the risk of default by giving borrowers clear, consistent terms for repayment.

Loan agreements should also be in place when lending money to friends and family. You may think a formal document isn’t needed for a transaction with loved ones, but the IRS has restrictions on money flowing between individuals. According to the gift tax, individuals are allowed to give up to $15,000 to any one person before tax implications kick in (this means married couples can give up to $30,000).

Your loan agreement for private-party loans will prove to the IRS that the money is not a gift and therefore not subject to the gift tax (which the giver usually pays). Plus, a loan agreement with clear terms and repayment guidelines can help save personal relationships that could otherwise be ruined by money misunderstandings.

These personal loan agreements between private parties are not hard to find. You can do a quick search online for “personal loan agreement templates,” or ask an attorney to draw one up for you. The cost may be well worth it to have a clear understanding of each person’s responsibility in a personal loan situation.

What is contained in a loan agreement?

When it comes to dealing with commercial entities such as banks or financial companies, most lenders have a standard personal loan agreement that serves as a binding contract for borrowers.

Here are the standard sections and items you’ll see in your personal loan agreement:

Principal loan amount

This is how much money you are borrowing. Personal loans typically range from $5,000 to $100,000.

Borrower, cosigner and lender information

This will contain personal identification information for borrowers, such as name and address. The lender’s information will also be in the contract.

Interest amount, calculation method and rate type

There are many combinations of interest types and rates possible for personal loans. Most personal loans are amortizing, which means payments are equally spaced with a simple (not compound) interest rate. This rate is often expressed as an annual percentage rate (APR). But there are other options and terms you should know about when it comes to these loan variations:

  • Compound interest: Interest charged on a total outstanding loan balance, including the principal and previously accrued interest.
  • Simple interest: Interest charged on a principal balance that is not then added to the principal balance.
  • Variable interest rate: An interest rate that changes over time, often based on prevailing market interest rates.
  • Fixed interest rate: An interest rate that does not change over time.
  • APR: The cost of borrowing money over the course of a year, including interest and fees, expressed as an interest rate.
  • Interest rate: The cost of borrowing money, expressed as a percentage of the loan amount.

If you are unsure of how the terms will affect your monthly payment, check the Truth in Lending Disclosure for your loan, which will give you a summary of your loan agreement for review purposes. It’s usually given to you by the lender before you officially accept the loan by signing the agreement. This disclosure is not your loan agreement but is useful for knowing upfront the costs of borrowing money before entering into the loan contract.

Date of loan transaction

This serves as the first date of your loan term.

Loan repayment term length

The term is how long you will take to pay the loan back. Terms for personal loans vary and are often between six and 84 months.

Loan payment method and due date

This section informs you of where to send your payment and the date it is due each month. If you don’t send your payment in accordance with the contract, your payment could be considered late or missed. Furthermore, changing repayment methods could increase your initial APR (e.g., paying with a check versus automatic [ACH] withdrawal.)

Return payment fees

If for some reason your payment is returned, this is the fee you will be charged.

Origination fees

Some lenders charge fees to process a loan application. This can be expressed as a flat fee or a percentage of your loan amount. The origination fee is often deducted from your initial loan disbursement from the lender.

Prepayment fees and penalties

You may be subject to penalties or fees for paying off a loan before the term is over.

Application of payment

This explains how your payments are applied and in what order they are applied to the principal, fees, interest, etc.

Penalties for missed and/or late payments

This section will tell you what exactly constitutes a late or missed payment.

State law notices

Contains special notices and legal provisions for residents of certain states.

What happens if the loan contract is violated?

A loan contract can be violated in a number of ways. On the borrower side, a violation may occur when a lender determines the borrower is in default. Default can happen for a variety of reasons, from missing payments to misusing loan funds.

In this case, the lender can demand funds be repaid in full. In addition, the borrower may have to agree to pay all costs of collecting delinquent payments and reasonable attorneys’ fees.

J.R. Skrabanek is a consumer law attorney and senior counsel at The Snell Law Firm, in Texas. He said that, when consumers violate a loan contract, there may be recourse if they actually show up in court. “In general, courts may be more willing to forgive unsophisticated consumers for mistaken contract violations than large companies,” he said. “However, contracts are usually enforced as written, and you very often have to go to court to enforce your rights.”

On the lender side, it’s rare that loan agreements are violated. However, lenders that engage in predatory lending practices or illegal debt collection practices could be violating state and federal laws that expressly forbid these kinds of activities. Skrabanek said such things may not violate the loan contract but may be punishable under regulations such as the Fair Debt Collection Practices Act.

Common legal terms

  • Usury and predatory protections: Laws that protect consumers from illegal and harmful lending practices.
  • Mandatory arbitration: A clause that requires borrowers to agree to an arbitration process to settle disputes over a loan agreement.
  • Breach or default: Failure to fulfill a contract obligation.
  • Contract length and amortization: Defines the loan term and whether or not loan payments are fully or partially amortized over that term.
  • Choice of law: States the jurisdiction under which the provisions of the loan agreement will be governed.
  • Severability clause: States that if some parts of the loan agreement are found to be illegal or otherwise unenforceable, the remaining provisions are still valid and enforceable.
  • Entire agreement clause: States that the loan agreement presented is complete.
  • Default provisions: Defines criteria that constitute a default event for borrowers.
  • Loan security: The collateral (some type of asset) pledged for a loan.

Bottom line

A personal loan agreement exists to protect both you and the lender. Before you take out a loan, make sure you have a full understanding of what this agreement entails, and what all the terms involved mean.

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Small Business

SBA Startup Loans – Know Your Top Options

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If you are looking for funding for your new business, you may have considered a U.S. Small Business Administration startup loan. There are many funding options to choose from, so you want to make sure that you do your research to find the option that works best for your business. Here are some tips, guidelines and things to consider in your research for an SBA startup loan.

The cost of starting a business

Determining how much money you need to start your business can take time. It will depend on your business model and what industry your business is in. Here are some things to consider so you can plan for how much startup financing you might need.

Initial fees

One of your first expenses will likely entail creating a legal structure for your business, and you may also need to pay to file articles of incorporation with your state. Even if you don’t plan on incorporating your business, you may require federal or state licensing and permits, which aren’t free, either.

Office space

Whether you need an entire store to set up shop or a single office, you’ll need to add the cost of renting or buying space to operate your business. If possible, consider starting the business from your home to reduce your overhead in the beginning, just make sure you’re following any community or neighborhood rules. You can read more about how to run a business from home without breaking any rules on LendingTree. MagnifyMoney is a subsidiary of LendingTree.

Equipment and inventory

Every business needs startup equipment, even if you’re a one-person operation. Needs vary by industry and may include vehicles, computers, machines or furniture. The costs of inventory are all across the board, too. If you’re opening a business in retail, wholesale or distribution, you’ll need to calculate inventory costs upfront.

Advertising

You won’t get many customers if no one knows you exist, so it’s pretty important to add marketing and advertising costs to your business budget. You may want signs, banners or business cards to promote your business, along with a well-designed website. With more than half of small businesses reportedly operating without a website, having one will give you an instant advantage.

For other startup costs, you could use the SBA’s startup costs worksheet to provide a better understanding of how much capital you’ll need for your startup financing.

How to secure an SBA startup loan

Not only does the SBA offer tools to help you plan your startup costs, it also offers training programs and education to grow your business, too. As you navigate the seemingly endless list of expenses you’ll need to cover to get your business off the ground, the SBA can help.

Jessica Mayle, district public affairs specialist at the SBA’s Illinois office, said, “Before seeking a loan, a small business owner should make sure he or she has a solid business plan, financial projections, collateral and other necessary materials. Working with a counselor from a Small Business Development Center or SCORE can help increase your chances of success.”

Though definite requirements vary by type of small business loan, here are a few general guidelines your business must meet:

  • You’ve exhausted all other private financing options.
  • You’re considered a small business.
  • You’ve been in operation more than two years.
  • You have a good personal credit score.
  • You have had no bankruptcies or foreclosures in the past three years.
  • You’re prepared to use personal assets as collateral to guarantee your loan.

Additionally, if you don’t already have a solid business plan in place, now is the time to create one. A detailed business plan that includes financial forecasts and statements is a requirement for any startup financing, including SBA loans.

The best SBA startup loans for 2019

SBA loans can be helpful for any business looking for startup financing. Through its partnerships with lending institutions like banks, microlenders and community organizations, the SBA can connect you with its best lenders for your small business.

Depending on what you want to use your SBA loan for and how much startup financing you need, there are a few options to consider.

SBA 7(a) Loans

As the most common type of SBA loan, these go up to $5 million and are used for almost any business purpose. SBA 7(a) loans add anywhere from 2.2 to 4.75% to a lender’s base rate and loans can be repaid from 10 to 25 years, depending on the purpose of the loan.

Minimum requirements:

  • Must be a for-profit business
  • Meets SBA size standards
  • Shows good character, credit and management; and the ability to repay
  • Must be an eligible type of business

Used for:

  • Funding startup costs
  • Purchasing equipment
  • Purchasing new land (including construction costs)
  • Repairing existing capital
  • Purchasing or expanding an existing business
  • Refinancing existing debt
  • Purchasing machinery, furniture, fixtures, supplies or materials

Two popular loans frequently accessed as part of the 7(a) loan program are the SBA Express Loan and the SBA Advantage Loan. With the Express Loan Program, your borrowing is capped at $350,000 but processing time is expedited for a quicker approval.

Advantage Loans are geared toward businesses that might not qualify for the standard 7(a) loan because of low revenues or other reasons. Though it does offer the same expedited service, the Advantage Loan limits lending to $250,000.

SBA 504 Loans

With a specific focus on small businesses looking to buy or build commercial real estate, the SBA 504 loans provide up to $5.5 million in financing. The SBA also facilitates the partnering of banks with a community development corporation (CDC) to cover the cost of funding the loan.

Requirements:

  • Alternative Size Standard: For-profit businesses that do not exceed $15 million in tangible net worth
  • Cannot have an average of two full fiscal years’ net income over $5 million
  • Owner-occupied 51% for existing or 60% for new construction

Used for:

  • Purchasing machinery and equipment
  • Fixtures, leasehold improvements
  • Working capital

This loan cannot be used to repay existing debt.

SBA CAPLines

If your business needs help with recurring payments or an unexpected expense, the CAPLines Program has five line-of-credit products designed for different goals and provides up to $5 million in financing.

The repayment term can be from five to 10 years.

Requirements:

  • Must be a for-profit business
  • Meets SBA size standards
  • Shows good character, credit and management; and the ability to repay
  • Must be an eligible type of business.

Used for:

  • Financing seasonal and/or short-term working capital needs
  • Cost to perform
  • Construction costs
  • Advances against existing inventory and receivables
  • Consolidation of short-term debts

Not sure which of the five programs are right for you?

Here’s a quick overview:

  1. Seasonal Line of Credit: Covers seasonal increases in inventory needs, labor costs or accounts receivable.
  2. Contract Line of Credit: Used for materials and labor needed for assignable contracts.
  3. Builders Line of Credit: Designed for contractors that build or renovate residential or commercial buildings.
  4. Standard Asset-Based Line of Credit: Allows small businesses to convert short-term assets, such as outstanding invoices, to cash.
  5. Small Asset Based CAPLines: Revolving Line of Credit to finance short-term working capital needs of the borrower.

SBA Export Loans

For global-business seekers, the SBA Export Loan provides funding to expand exports, participate in international transactions and enter new foreign markets. Repayment terms extend up to 25 years.

Requirements:

  • Must be a for-profit business
  • Meets SBA size standards
  • Shows good character, credit and management; and the ability to repay
  • Must be an eligible type of business
  • Engaged in or preparing to engage in international trade
  • Adversely affected by competition from imports

Used for:

  • Permanent working capital
  • Equipment
  • Facilities
  • Land and buildings
  • Debt refinance related to international trade

If you’re seeking a quicker funding opportunity, the SBA Export Express Loan is another option, though you’re limited to $500,000 in financing. There’s also the SBA Export Working Capital Loan that allows up to $5 million to help cover the costs associated with entering a new export marketing or expand in an existing one.

SBA Microloans

While most loans are geared toward for-profit businesses, SBA Microloans are specifically designed to provide loans to nonprofit intermediaries who then lend amounts of less than $50,000 to for-profit small businesses and nonprofit child care centers. You’ll have up to six years to repay a microloan .

Requirements:

  • Must be a for-profit business
  • Meets SBA size standards
  • Shows good character, credit and management; and the ability to repay
  • Must be an eligible type of business

SBA Disaster Loans

When natural or human-made disasters strike, small businesses can suffer immensely. The SBA Disaster Loans offer financial help for businesses to recover from a declared disaster.

Depending on the type of emergency, there are three types of loans to choose from:

  • Physical Disaster Loans
  • Economic Injury Disaster Loans
  • Military Reservists Economic Injury Loans

Borrowing through this program gives you access to as much as $2 million, with a repayment period of up to 30 years. The interest rates of 4 to 8 percent are quite reasonable, too.

Requirements:

  • Business must have suffered damage from a physical or economic disaster
  • Military Reservist loans are offered when essential employees are called to active duty

Used for repairs/replacement of:

  • Real property
  • Machinery
  • Equipment
  • Fixtures
  • Inventory
  • Leasehold improvements

Finding the right SBA loan for your small business

Determining how much funding you need and what type of SBA loan you should apply for is a tedious and time-consuming task.

Your local SBA District Office can help with personalized one-on-one guidance to calculate your startup financing needs and to select the right loan program. Finding the right SBA loan will push you through the difficult first few years to grow into a well-established and successful small business.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Building Credit, Credit Cards

Guide to Adding an Authorized User to Your Credit Card

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Disclaimer: Though we have done our best to research information regarding this topic, be aware that issuing banks may have unique rules and agreement terms that apply to their particular credit card accounts. Contact issuing banks directly for questions on terms and policies relevant to specific credit card accounts.

What is an Authorized User?

An authorized user on a credit card account is any person you allow to access your credit card account. Not to be confused with a joint account holder, an authorized user can only make purchases and, in some cases, have access to certain card benefits. Joint account holdership is becoming extremely rare, but typically occurs when two people apply for a credit card together. In joint account ownership, both people are liable for charges and can access and make changes to a credit card account.

An authorized user can be a spouse, relative, or employee. When you designate an authorized user on your credit card account, this person usually gets a card bearing their name with the same credit card number as the primary cardholder. In this scenario, the primary cardholder is liable for all transactions made by themselves as well as by any authorized user tied to their account.

Why Would You Add an Authorized User to Your Credit Card Account?

There are many reasons you might think about designating an authorized user for your credit card account. It all comes down to convenience and extending benefits that a credit account offers: access to credit, related benefits, and credit card rewards, as well as the potential to improve the credit score of the authorized user.

For example, couples that share expenses might find it easier to designate one or the other as an authorized user to avoid passing a single card back and forth to make purchases. Perhaps you have a relative who lives far away, and it would be easier to give them access to your credit account for emergency purchases. You may also have a child that you want to assist in building credit history to increase their credit score. Adding them as an authorized user could help with this, but we’ll cover that more in another section.

Additionally, if you are an employer whose employees need to make purchases on behalf of the company, it would make sense to make them an authorized user. Without this designation, it could be extremely inconvenient for them to not have a company credit card at their disposal.

In some cases, adding an authorized user can also accrue reward points connected to a credit card account. These reward points can be used to make purchases or receive discounted pricing on things like travel and retail products. Typically, points are accrued from reaching credit card spending amounts within a certain time frame. Sometimes, the act of adding an authorized user can garner additional rewards as well.

How Can I Add an Authorized User to My Credit Card Account?

Credit Card Issuer

Age Requirement

American Express

13 or 15 years old, depending on the card

Barclays

13 years old

Bank of America

No minimum age requirement

Capital One

No minimum age requirement

Chase

No minimum age requirement

Citi

No minimum age requirement

Discover

15 years old

U.S. Bank

16 years old

Wells Fargo

No minimum age requirement

As the primary cardholder you are the only person who can designate an authorized user. The authorized user cannot contact the credit card issuer and add themselves to your account. You will have to contact the issuing bank and request to add one or more authorized users to your account.

Depending on the bank and the technology in place, you may be able to handle this process entirely online. Some banks allow you to log in to your banking portal to designate additional authorized users, create their own bank login and profile as well as determine the level of access you’d like them to have to your account. Levels of access can range from being able to view transactions only to making purchases. If your bank doesn’t have this technology in place, usually a phone call is sufficient.

Adding Authorized Users Online

How to Add an Authorized User to a Chase Credit Card Account:

  1. Log into your Chase credit card account
  2. Under “My Accounts” click “Add Authorized User”
  3. Complete the information requested (see screenshot below for reference)How to Add an Authorized User to a Chase Credit Card Account

How to Add an Authorized User to a Bank of America Account:

  1. Log onto your Bank of America account.
  2. Select the credit card you’d like to change.
  3. Click on the tab labeled ‘Information & Services’
  4. Scroll down to the section labeled “Services”
  5. Click on “Add an authorized user”

How to Add an Authorized User to a Chase Credit Card Account

screen shot 2

How to Add an Authorized User to a Capital One account:

  1. Log onto your Capital One credit card account online.
  2. Under the “Services” tab, click “Manage Authorized Users”
  3. Click “Add New User”

screen shot 6
screen shot 7

How to Add an Authorized User to a American Express credit card account:

  1. Log onto your Amex account online.
  2. Click on “Account services”
  3. From the lefthand menu, select “Card Management”
  4. Under “Account Managers”, click “Add and Manage Users with Account Manager”screen shot 10
    screen shot 11

How to Add an Authorized User to a Citi credit card account:

1. Log onto your Citi credit card account online.
2. Select the “Account Management” tab.
3. Click “Services” from the lefthand menu.
4. Click “Authorized Users”
5. Click “Add an authorized user”
6. Fill in the authorized user’s personal information.

 

screen shot 14

 

 

screen shot 12

How to Add an Authorized User to a Barclays credit card account:

  1. Log onto your Barclays credit card account.
  2. Select the “services” tab.
  3. Under the dropdown menu, select “Authorized users”
  4. Select “Add an authorized user”
  5. Complete the form to add an authorized user.
    screen shot 17screen shot 18screen shot 20

Who Can Be an Authorized User on My Account?

An authorized user can be anyone you choose, whether they are related to you in some way or not. In most cases, the bank will request identifying information such as name, birthdate, Social Security number, and address. Some card issuers require that authorized users meet age requirements, and others do not have age requirements. As always, check with the bank to understand the criteria authorized users must meet for your card.

The Fees

Some credit cards will charge an additional fee for more additional authorized users, while others will offer this benefit at no charge. Make sure you read the fine print in your cardholder agreement so that you are aware of all the fees associated with having one or more authorized users on your account.

Fees can range from less than $100 to a few hundred dollars and beyond each year. Business accounts especially can carry higher fees when multiple authorized users are associated to one account.

Liability

As the primary account holder, you must understand that you are 100% solely liable for any and all charges made on your account by both yourself and your authorized user. If you have been designated as an authorized user, you do not legally share liability for purchases made on the credit card account. However, you may have a personal arrangement with the primary account holder to pay your share of charges when the bill is due.

What Can an Authorized User Do?

This can depend on the level of access you’ve chosen with your card issuer for your authorized user. If there are not varying levels of access to choose from, check with the card issuer to find out exactly what an authorized user can and cannot do.

In most cases, an authorized user cannot make changes to an account. They cannot close an account, request changes in bill due dates, change account information, or request limit increases or a lower annual percentage rate.

Again, this varies from card issuer to card issuer, but there are many other things an authorized user can do.

Here are some possible capabilities based on the terms of your credit card issuer:

  • Make purchases
  • Report any lost or stolen cards
  • Obtain account information
  • Initiate billing disputes
  • Request statement copies
  • Make payments and inquire about fees

Benefits of Adding an Authorized User

As mentioned before, adding an authorized user to a card can be for convenience, accruing rewards, or sharing card benefits. An authorized user can be incredibly convenient in the case that you don’t have your personal card or for some reason don’t have immediate access to it.

Having an authorized user can help a primary user reach limits to earn reward points for some cards. One of the most effective marketing strategies of credit card companies is to offer bonuses and rewards for adding authorized users to your account. Adding another user to your account could add a few thousand extra reward points you would not have earned without adding the user. Then, there’s always the chance that the authorized user will make purchases that contribute even more to your attempt to accrue reward points.

Finally, there are a number of credit cards that offer benefits or benefits that can extend to your authorized users. Depending on your credit card, benefits like car rental insurance, lost luggage reimbursement, and extended warranties could apply to all purchases made, including those by your authorized users, on your credit card account.

Benefits of Becoming an Authorized User

Though the credit-reporting landscape is changing, there’s still the potential to “piggyback” on a primary account holder’s credit history for a card in good standing. But not all credit card companies report information to credit bureaus for authorized users in all circumstances. However, to know for sure what will be reported to the credit bureaus in regard to your authorized user status, speak with your card issuer for the details of what information is reported and when to credit bureaus.

Another benefit is having access to more credit. If you are in a bind and have emergencies that come up, access to credit can be helpful. Plus, exercising diligence in managing purchases and bill payment can help you develop good credit habits.

You should also know that being an authorized user may grant you access to certain benefits for account holders and their primary users. There are benefits like access to travel lounges, Global Entry or TSA PreCheck application, travel credits, and discounts an authorized user could be privy to as well.

What Could Go Wrong?

If for some reason the credit card account doesn’t remain in good standing, the credit score of both the primary account holder and the authorized user could be affected. If you are a primary account holder, make sure your authorized user understands the terms under which they can make purchases. If they make purchases that cause your payments to be delinquent, your credit score could suffer.

Even if you did not give this person permission to make purchases with your credit card account, the fact that you designated them as an authorized user is evidence that you at some point trusted them with your credit card access. A claim of criminal or fraudulent activity in this instance would be extremely difficult to prove, so choose your authorized users wisely.

Though not as common with an authorized user, your credit score could be negatively affected if an account becomes delinquent. Because tradeline reporting for authorized user accounts to credit bureaus varies from card to card and scenario to scenario, a delinquent account status could still appear on your credit report. If you will be added to someone’s account as an authorized user, find out whether or not the credit history of the account will be reported to credit bureaus under your authorized user status.

Removing an Authorized User from an Account

Either the primary cardholder or the authorized user can remove an authorized user from an account by contacting the credit card issuer. You may be asked to verify your information as well as the information of the primary account holder.

In many cases, only one card number is issued between one or more users. Your credit card company may deactivate the primary cardholder’s credit card number and reissue a new card and number once an authorized user is removed from an account.

If your status as an authorized user does show up on your credit report for the credit account after you’ve been removed from a credit card account, you may have to contact credit bureaus to have it removed.

The Best Way to Manage Shared Credit Access

Designating someone as an authorized user is not something to be taken lightly. Even a small misunderstanding of credit card issuer terms and your own interpersonal credit arrangement can cause problems. Before adding an authorized user to your account, set ground rules around card use that covers access to benefits and making purchases.

Some things to consider and discuss with your authorized user include:

  • What is the goal in having the authorized user on the account?
  • Will the authorized user have a physical card?
  • When is it OK to use or not use the credit card to make purchases or access card benefits?
  • The credit history of both the primary cardholder and the authorized user
  • Good credit habits that will prevent identity theft and fraud
  • Setting up monitoring alerts with the credit card company or an identity theft protection service

The ability to add an authorized user to a credit card account can be a double-edged sword. On one hand, convenient benefits of access to credit and credit card benefits can make life easier in so many ways.

On the other hand, this same convenience can cause problems if both the primary cardholder and the authorized user don’t understand the rules of engagement with each other or the terms set forth by the credit card company.

Adding an authorized user to your account has the potential to be incredibly convenient and mutually beneficial if handled the right way. Make sure you follow best practices to get the most out of this financial arrangement.

Recommended Cards

Blue Cash Preferred® Card from American Express

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Blue Cash Preferred® Card from American Express

Regular Purchase APR
13.99%-23.99% Variable
Intro Purchase APR
0% on purchases for 12 months
Intro BT APR
N/A
Annual fee
$0 introductory annual fee for one year, then $95
Rewards Rate
6% Cash Back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%). 6% Cash Back on select U.S. streaming subscriptions and 1% Cash Back on other purchases.
Balance Transfer Fee
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Credit required
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Chase Freedom®

The information related to Chase Freedom® has been independently collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

Chase Freedom®

Regular Purchase APR
14.99% to 23.74% Variable
Intro Purchase APR
0% Intro APR on Purchases for 15 months
Intro BT APR
0% Intro APR on Balance Transfers for 15 months
Annual fee
$0
Rewards Rate
Earn 5% cash back on up to $1,500 in combined purchases in bonus categories each quarter you activate. Enjoy new 5% categories every 3 months. Unlimited 1% cash back on all other purchases.
Balance Transfer Fee
3% when you transfer during the first 60 days of account opening, with a minimum of $5
Credit required
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Excellent/Good

Citi® Double Cash Card – 18 month BT offer

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The information related to Citi® Double Cash Card – 18 month BT offer has been independently collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

Citi® Double Cash Card – 18 month BT offer

Regular Purchase APR
13.99% – 23.99% (Variable)
Intro BT APR
0% for 18 months on Balance Transfers
Annual fee
$0
Rewards Rate
Earn 2% on every purchase with unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases.
Balance Transfer Fee
3% of each balance transfer; $5 minimum.
Credit required
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