There was recently a case where a person received a fraction the credit limit of their spouse, even though the couple had been married for many years and filed joint tax returns. This type of situation can result in confusion and disappointment when credit underwriting procedures aren’t understood.
When discussions around existing credit capacity ensued in this case, the possibility was raised that some individuals may be added to their spouses' card as an authorized user rather than jointly as had been assumed, causing confusion. We thought we should explain how joint credit and authorized users work. Here, we are going to explain three lending concepts: Joint credit, Authorized users, and Co-signers.
What is joint credit?
Joint credit is credit that is taken out in two names, typically a husband and wife. If the loan is done jointly, then both parties equally share both credit privileges and responsibility for repayment. Normally, the account will report equally as a joint credit account on both user's credit reports, and fully figure into any credit score calculations for purposes of evaluating usage and repayment performance. Joint credit is a traditional concept, and almost always used in mortgage lending for married couples.
Most banks will not create joint credit card or personal loan accounts, as these loans are unsecured and in the case of a default, the bank really prefers to go after one individual rather than two people who may try to dispute their responsibility for the debt. For example, in the case of a credit card default, one joint cardholder may claim they only signed so the other could obtain the card, but never used or benefited the account. While legally the bank is entitled to collect from both signers jointly and severally, this may put the bank in an awkward position in the case of disputes. This is not an issue for mortgage loans where both signers live together in the same home-there would be no dispute that both signers benefited from the loan and therefore easy for the bank to collect.
With marriage rates declining and more married couples handling finances separately, joint credit as a concept is quickly disappearing. Again, it is primarily used for mortgage loans. Even if you ask a bank to be listed jointly, many loan officers will simply add you as a co-signer or authorized user, which has the sometimes unwanted effect of keeping you from benefiting from the good credit history the account may build as it's used and repaid.
What is an authorized user?
An authorized user is just what it sounds like-a person authorized to use the account. A type of account user common in the credit card industry, it's a common practice to add a spouse, child, business partner or other trusted person to your credit card account as an authorized user. This normally gives the person a card of their own, and privileges to make charges on the account. Some banks allow you to set limits on the authorized user, and give you additional controls such as monitoring, suspending, limiting or revoking access to the user at any time. Even though an authorized user may make charges on the account, he or she is not responsible for paying those charges. It's usually possible to assign an authorized user as an account manager or give other elevated roles to allow the user to fully manage the credit card account, and this is sometimes done when a primary cardholder has an assistant or financial manager who is responsible for managing the operation of their account.
Sometimes the account reports to the authorized user's credit history, however most of the time, the account will be marked on the report as an "authorized user account" and this will often cause the account to be skipped over in score calculations or in making a determination regarding credit limit on a new account. For example, based on the fact that banks typically base new credit limits on your largest existing credit limit, a user with a card of their own of $1000, and an authorized user account of $5000 may expect to be granted a credit limit of $6000. Unfortunately, in many cases, the bank will recognize the authorized user account and exclude it from calculations in determining the current credit capacity of the individual. The user would more likely be granted a credit limit closer to $1800. Some of the disappointment surrounding the recent Apple Card situation could very well have to do with the aforementioned scenario.
What is a co-signer?
A co-signer is very similar to a joint borrower, except that the primary signer is considered the primary user of the account, and the co-signer is typically added to give a boost to a weaker primary applicant. This is a common way for parents to help their children obtain access to credit, as the structure of these loans focus on building the individual credit of the primary signer. The co-signer typically has all rights to the account, and is jointly responsible for repayment in case of default. Accounts that you co-sign sometimes appear on your credit report, and sometimes don't. It really just depends on the specific bank's policy for that specific product.
Why is this just now becoming an issue?
Because as we move toward computer assisted and fully computer-controlled lending decisions, we are seeing every user evaluated as an individual, without regard to their spouses income or position. Where in the past, a human underwriter may have taken into account your entire situation, why you may be an authorized user on multiple high-limit cards, whose accounts these are, and made other judgments based on inferred information, this is often no longer the case. This is why it's vitally important for anyone who is interested in building a strong credit standing to take responsibility for building their own credit, under their own name, and aggressively pursue the best terms and limits possible.