When Is “Joint Debt” Not Really Joint?
Authorized Users & Guarantors
By Julie Jaggernath
Joint debts arise in several different ways. You might have co-signed a cell phone contract to help a friend or applied for a joint credit card with one of your children to help them build their credit rating. Other forms of joint credit might come about when you build a life with a partner. This could be a joint mortgage to buy a home or a joint bank account with a line of credit for emergencies, home renovations, or educational costs.
However, there are two instances when having more than one name on a credit agreement isn’t the same as being joint borrowers: guarantors for loans and authorized users on credit cards. Both can result from wanting to help a close family member or friend who is having some financial trouble or who might not have a (strong) credit rating of their own.
What Does It Mean to Be a Guarantor?
A guarantor is much like a co-signer, but they are a step removed. It is a less common form of joint debt that many people don’t even know about. A guarantor is someone with a strong credit rating and net worth, as well as a close relationship with the primary borrower(s). A guarantor is qualified during the application process, the same way the borrowers are, but the relationship is essentially just a promise to pay should the borrowers default. In some situations, the guarantor promises to pay whatever is left outstanding as a lump sum.
As a condition of becoming a guarantor, a lender typically insists that a guarantor receive independent legal advice before signing the loan agreements. This is so that a lender can be extra sure that anyone acting as a guarantor understands the terms and conditions of the agreement.
It’s a crucial step for any borrower to fully understand an obligation they take on, but it’s even more important for a guarantor because they don’t have the same access to the loan or credit that a borrower does. It’s a legal promise to pay a debt but with no ability to use or benefit from the credit.
How Does Credit Reporting Work for Guarantors?
Credit reporting with joint debts usually means that any payments or use of the credit is reported on the credit bureaus of all borrowers. But when it comes to guarantors, along with some differences between lenders, they are treated on an exception basis.
Generally speaking, an initial debt is reflected on a guarantor’s credit report, e.g. a loan for $25,000, but payments are not reported each month as long as the primary borrowers follow through as agreed. If the borrowers default, then the debt is reported normally on the guarantor’s credit file because they are now responsible for making the agreed upon payments or paying the debt off entirely with one payment.
Is an Authorized User Joint on a Credit Card?
A unique type of “joint” credit card is where the primary borrower authorizes others to use their credit card account. While each authorized user has a credit card in their own name, they are not co-borrowers and the credit card account is not joint. Responsibility for all that is owed rests entirely with the approved borrower(s). It is up to a primary borrower to ensure that authorized users see their portion of each bill and make any required payments.
Are You Missing Out If You Don’t Have a Credit Card?
Do Authorized Users Have Restrictions?
Authorized users have restrictions, some of which are determined by the credit card company and others are determined by the primary borrower. For instance, authorized users are not able to make changes to the account, are not subject to credit checks, might have limits on how much they can charge/cash advance during each billing cycle, and using their card does not build or re-build their credit rating. Not all credit card companies offer authorized user cards, or they many have conditions around who can become an authorized user.
Why It Can Be Worth Making Someone an Authorized User
Despite their limitations, authorized user cards have their place. It’s one way to give a teenager, young adult, or anyone else who can’t apply for their own credit card, one to use for emergencies. If the credit card has features, e.g. travel medical insurance, that you want to extend to your family members, an authorized user card usually does the trick (read your terms & conditions carefully to be sure). It also allows you to earn travel miles or reward points more quickly.
Authorized User Cards Can Help Teenagers Learn About Credit
Setting your kids up with authorized user cards allows you to help them learn how credit cards work, long before they can apply for their own card. With younger teens, set the limits as low as you can (speak to your credit card company to do that) and allow them to make small, pre-determined purchases. Show them their portion of the bill and talk about what it means to repay what was borrowed.
As your teens get older and closer to the age when they can apply for their own credit card, loosen the restrictions a bit if they are responsible with their money. Give them their portion of the bill each month. Help them set up bill payments through their bank or credit union’s website or app. Just be sure that they are making their payments because as the primary cardholder, you are ultimately still the one responsible for adhering to your cardholder agreement.
Tips to Help Teens Gain Money Skills
How to Go It Alone and Avoid Joint Debt, a Guarantor, or Becoming an Authorized User
Guarantors on credit applications are less common than authorized users on credit cards. While both have their place when it comes to tools for Canadian consumers to deal with their finances, they are less-typical options that many people aren’t familiar with. If you need help with rebuilding your credit rating, managing money better, or dealing with debt, reach out to us with your questions. There are also many little-known debt solutions that one of our credit counsellors can tell you about. It might just be what you need to avoid the pitfalls of joint debt and protect your relationships with family and friends who want to see an end to your financial problems.