CREDITCOLLEGE

Credit: Co-Signers, Co-Borrowers and Authorized Users

There is a lot to explore, learn, and understand about credit. Over time working in the financial world, I became aware of how many people were unfamiliar with one credit topic: the difference between an authorized user, a co-borrower, and a co-signer. Knowing the difference between these three options can help shape your credit report, credit score, and your reputation as a borrower. Being aware of what each of these terms means could help protect you from derogatory reporting or fraud on your credit report as well. Continue reading to learn more about how authorized users, co-borrowers, and co-signers differ.

Authorized User

An authorized user is someone who receives the benefits of using a line of credit, like a credit card, without the responsibility of paying back the debt to the card company. A good example would be if your parents have a credit card and add you to the account as an authorized user for emergency use. If you experienced an emergency and used the card, your parents may expect you to pay them back, but you would not be responsible for repaying the debt with the card company directly.

It can be beneficial to be an authorized user to build positive credit history if you aren’t ready for the responsibility of taking on your own debt. Keep in mind, your score will develop – good or bad – based on the person who owns the card so it’s good to understand their credit habits before becoming an authorized user.

Alternately, allowing an authorized user on your account leaves you responsible for any debt that person may incur. In some ways, you can look at having an authorized user on your credit card like loaning money. When loaning money to a family member, the intention is to have them repay you, but there may be little repercussion for them if they fail to do so. If you allow a person to be an authorized user, you are giving them access to money they may never repay. If you don’t have the funds to pay the bill, your credit report and score could suffer in addition to your bank account.

Being an authorized – or allowing an authorized user – takes a significant amount of trust and accountability, which requires strong communication and healthy boundaries. Setting boundaries between yourself and your family can lead to maintaining positive relationships along with improved finances.

Co-Borrower vs. Co-Signer

The terms co-borrower and co-signer tend to get confused the most when it comes to credit lingo. Think of co-borrowers as partners and co-signers as mentors.

A co-borrower will have equal usage and responsibility for the credit, loan, or asset once approved. For instance, if you live with your sister and need a vehicle to share, then she will likely be a co-borrower since you both will be using the vehicle equally.

A co-signer is like a credit mentor. If your credit score is not high enough to take out a loan independently, you may choose to find another person with good credit who will sign the loan with you but has no ownership of it. Your co-signer will likely help teach you what they know about credit and help keep you accountable with making on-time payments. Traditionally, family members such as parents, grandparents, aunts, and uncles will be co-signers. It’s important to understand that if you don’t pay the loan back though, it not only impacts your credit report and score, but your co-signer’s credit will be affected as well. The reverse can happen to you also. If you are a co-signer and the person you signed a loan with does not repay the debt or continuously makes late payments, then your credit score and report will be negatively impacted along with theirs.

Credit can feel like a complicated subject but it’s important to take charge of your financial future by reaching out to trusted friends, family, and reputable companies to get a better understanding. Authorized users, co-borrowers, and co-signers are tools within the world of credit that could be beneficial for you to use or could become a hinderance depending on your financial situation. It’s important to fully understand the differences between authorized users, co-borrowers, and co-signers for your financial future.

Sources:

https://www.bankrate.com/finance/credit-cards/authorized-user-vs-cosigner-credit-card/#:~:text=Where%20a%20co%2Dsigner%20is,for%20paying%20back%20their%20charges.

https://www.experian.com/blogs/ask-experian/coborrower-vs-cosigner/