Co-Signers vs. Authorized Users: When and Where to Use Each

Lisa Sullivan

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Published on 10-30-2017

Categories: Member Tips

The following is a guest blog post by Ashley Dull of Digital Brands, Inc.

co-signers vs authorized users

The term “jargon” refers to words and phrases specific to a particular field or industry, which typically require a certain level of expertise to understand. And whether referring to obscure financial terms, indecipherable medical acronyms, or unintelligible legalese, jargon is a small word for what can be a big problem.

In the financial industry, for example, the use of jargon and other unfamiliar terms can cause consumers significant confusion. And unfortunately, some terms you simply need to learn to achieve success with your personal finances.

Two important personal finance terms to learn are co-signer and authorized user. While the two terms describe concepts that can be easily confused, knowing the difference can help you make better financial decisions, particularly if you or your loved ones are just getting started on your credit journey.

Co-signers Can Help You Get Approved for Credit

Any time you wish to obtain a new credit line, be it a credit card, loan, or mortgage, creditors will check your credit reports and scores to determine your credit risk. Applicants perceived as being at a high risk for default, generally due to low credit scores or a nonexistent credit history, may be charged higher rates or even be rejected for credit altogether.

In these cases, applicants can apply with a co-signer to increase their approval chances. At its most basic, a co-signer is someone who agrees to share responsibility for a credit product with the primary borrower. Co-signers are not joint applicants; instead, co-signers act as a sort of living collateral, as they will be on the line for repaying the debt if the primary borrower becomes unable to do so.

Applications for unsecured credit lines, such as personal loans, are generally more likely than secured loan applications to require a co-signer for poorly qualified candidates. Requests for co-signers are particularly common when the primary applicant is a young person who has yet to establish credit, such as college freshmen applying for student loans.

For instance, consider Bob, a hypothetical college graduate moving into his first apartment. To buy furniture, Bob needs a small personal loan, but without an established credit history, creditors assume that Bob is a risky borrower and reject his loan application. However, if Bob’s parents, who have good credit, agree to co-sign the loan  — basically telling the lender that they will repay the loan if Bob cannot — Bob’s perceived risk decreases and his application is more likely to be approved.

Applying with a co-signer can also help borrowers with bad credit gain credit approval, and may even lead to a better (read: lower) interest rate. If you don’t have a co-signer, you can compare personal loans for people with bad credit to find the best rate options, but be prepared to pay a higher interest rate than those with good credit.

Because co-signers are agreeing to take responsibility for the debt if the primary applicant is unable (or unwilling) to do so, the decision to co-sign a credit application should not be taken lightly. Should the primary borrower default on the debt, the co-signer’s credit can be damaged, and the lender can even take the co-signers to court to collect the debt. Any potential co-signers should give full consideration before agreeing to co-sign for anyone.

Becoming an Authorized User Can Help Build Your Credit

While co-signers are important for many aspects of consumer lending, authorized users are typically relegated to the world of revolving credit. Specifically, an authorized user is someone who has been given access and may charge purchases to a particular credit line, such as a credit card or charge account, on which he or she is not the primary borrower.

Authorized users are generally given a credit card that is tied to the account. The card is under their own name, and they may use the account’s funds more or less as their own. In the case of a credit card that offers points or cash back, any rewards earned by the authorized user are credited to the main account.

Additionally, authorized users hold no financial responsibility to repay the debt. Even if the primary borrower defaults on the debt, the creditor cannot go after the authorized user to seek repayment. That said, many credit card issuers will include authorized users in their reports to the credit bureaus. This means a credit card or account for which you are an authorized user will likely show up on your credit reports and influence your credit score.

Since many issuers will allow cardholders to add authorized users under the age of 18, becoming an authorized user can be a good way to establish a credit history before you are even able to apply for a credit card on your own. Of course, this is only really effective if you are an authorized user for someone who maintains low balances and always pays on time.

If the account holder keeps a high balance or frequently makes late payments, however, your own credit can suffer. Of course, becoming an authorized user on someone's account is hardly the only way to establish a credit history or build credit. Many major issuers offer entry-level credit cards for no-credit applicants that can be a great way to start building credit.

Don’t Let Terminology Get in the Way of Obtaining Credit

While it can be confusing to navigate the world of financial jargon, once you know the terms it becomes much easier to handle your personal finances like a pro. Not only will you be better equipped to make informed choices, you may also have a better understanding of what options are out there, as well as which ones are best suited for your particular situation.

For example, knowing when and where you may need -- or need to be -- a co-signer or authorized user can help you (or a loved one) get a much-needed credit line or a solid jumpstart on building credit. It can also prevent you from suffering credit damage due to a well-intentioned, but poorly informed, choice to take responsibility for someone else’s debt.



Ashley Dull is the Finance Editor at Digital Brands, Inc., where she oversees content published on CardRates.com and BadCredit.org. Ashley works closely with experts and industry leaders in all sectors of finance to develop authoritative guides, news, and advice articles with regards to audience interest.


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