The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Being an authorized user can positively, negatively or minimally impact your credit score, depending on the primary cardholder’s financial actions surrounding monthly payments, credit history and credit utilization.
Whether you’re just starting to build your credit or have made some financial choices that have negatively impacted your credit, you’ve likely noticed that building credit isn’t easy. However, adding yourself as an authorized user on someone else’s credit card account is a useful way to establish new credit.
So, how does being an authorized user affect your credit? Let’s explore the various ways being an authorized user can impact your credit and how to start building credit using this strategy.
Table of contents:
What is an authorized user on a credit card?
An authorized user is an individual who is attached to another person’s credit card account but is not the primary cardholder. Authorized users are not legally responsible for credit card charges or ensuring on-time payments. They typically receive a credit card issued under their name, which is linked to the cardholder’s account.
However, the primary cardholder will receive the monthly statement for the card, not the authorized user. It’s the cardholder’s responsibility to complete payments for that card. Some credit lenders split charges by card so the cardholder can see which charges are being made by the authorized user.
How does being an authorized user affect your credit?
Being an authorized user on someone else’s account can both negatively and positively impact your credit. You’re taking a risk based on trust and communication that the primary cardholder will consistently complete payments on time and maintain a good credit history. Below are a few ways being an authorized user can affect your credit.
1. Help build your credit
If the primary cardholder consistently submits monthly payments on time and maintains a low credit utilization, you should see a positive impact on your credit. Before asking to be added to the account, ensure that the cardholder has a good credit history and that the credit lender they use reports it to the three major credit bureaus—Equifax®, Experian® and TransUnion®. This way, your authorized user account will eventually show up on your credit report.
2. Hurt your credit
Becoming an authorized user on someone else’s account, regardless of their relationship to you, involves taking a risk. Your credit can be negatively impacted if the primary cardholder fails to make timely payments or accumulates a high credit balance. If this happens, it’s best to remove yourself from the account to prevent any further impact on your credit.
3. Minimally impact your credit
If the card’s lender doesn’t report authorized user activity, the account won’t appear on your credit report. As a result, you won’t see any impact, positive or negative, on your credit.
How to build credit as an authorized user
Becoming an authorized user is a great way to start building credit or repairing a bad credit score. Follow the steps below to better your chances of successfully building credit through this method.
1. Choose the right credit card holder
Carefully consider who you want to ask to add you as an authorized user on their credit card account. Choose a relative or close friend who you can trust to make timely payments and who has a good credit history and low credit utilization.
2. Request to be added to the account
Kindly ask the primary cardholder to add you as an authorized user on their account. Keep in mind that not all credit lenders report authorized users to credit bureaus, so research the credit lender before proceeding with the approval process.
3. Monitor account activity and payments
Whether you’re using the credit card account or not, it’s important to communicate with the primary cardholder about payments and spending limits. While you aren’t legally responsible for submitting payments on time, you want to ensure that you’re not overspending on the account and increasing the utilization ratio—this ratio represents the proportion of your total credit limit that you’re using.
4. Regularly check your credit report
Regularly check your credit report to ensure that your authorized user activity is reported accurately and is positively affecting your credit. If you notice a negative impact on your credit, check to see if the primary cardholder is making timely payments and maintaining low credit utilization. If they aren’t, consider removing yourself from the account before your credit health worsens.
Authorized user FAQ
Below are answers to some common questions about how being an authorized user can affect your credit.
Who can be an authorized user?
Anyone can be an authorized user of a credit account. However, typically authorized users are family members, close friends, employees and legal guardians. Most commonly, authorized users are young individuals who want to build credit or have a poor credit history.
Who should you ask to add you as an authorized user?
While anyone can add you as an authorized user on their account, it’s best to ask someone you can trust and are close with. Relatives and close friends who have excellent credit and demonstrate a history of timely payments are good choices, as this behavior can further increase the likelihood of improving your credit.
Will adding someone as an authorized user hurt my credit?
Adding an authorized user to your credit account shouldn’t negatively impact your credit. If you maintain full control of the account and make payments on time, both you and the authorized user will benefit. However, if the authorized user misuses your credit on your account, both you and the authorized user can be negatively impacted.
Does removing an authorized user hurt their credit score?
Removing yourself as an authorized user on an account may affect your credit score. Removing yourself from an account with a good payment history may cause a slight decrease in your credit score, as you’re no longer benefiting from the credit account.
However, opening your own credit card as soon as you remove yourself from the other account can minimize the impact on your credit history. Additionally, if the primary cardholder isn’t making payments on time or is maxing out the card, removing yourself as an authorized user can benefit your credit. That’s why it’s important to carefully consider whose credit account you add yourself to.
What’s the difference between joint credit cards and authorized users?
Joint credit cards function exactly like a normal credit card, but they are shared by two people rather than one primary cardholder. The biggest difference between joint account holders and authorized users is that with a joint account, both parties are legally responsible for making payments on the account.
Additionally, those who apply for a joint credit card can expect to have their credit history and other financial information considered during the application process, whereas the authorized user’s typically isn’t considered.
How long until an authorized user account shows on your credit report?
The amount of time it takes for an authorized user account to show on your credit report depends on the credit bureau and when it’s reported. However, it’ll typically show up within 30 days of adding the authorized user to the account. Ultimately, being an authorized user can be a valuable tool for building credit, but it’s important to weigh the benefits and risks carefully. Not sure where to start but need help building your credit? Learn more about services offered at Lexington Law Firm and start repairing your credit today.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Sarah Raja
Associate Attorney
Sarah Raja was born and raised in Phoenix, Arizona.
In 2010 she earned a bachelor’s degree in Psychology from Arizona State University. Sarah then clerked at personal injury firm while she studied for the Law School Admissions Test. In 2016, Sarah graduated from Arizona Summit Law School with a Juris Doctor degree. While in law school Sarah had a passion for mediation and participated in the school’s mediation clinic and mediated cases for the Phoenix Justice Courts. Prior to joining Lexington Law Firm, Sarah practiced in the areas of real property law, HOA law, family law, and disability law in the State of Arizona. In 2020, Sarah opened her own mediation firm with her business partner, where they specialize in assisting couples through divorce in a communicative and civilized manner. In her spare time, Sarah enjoys spending time with family and friends, practicing yoga, and traveling.
What happens to your bank account when you die will depend on what type of bank account it is, how you set up the account, and whether you have a will.
When the owner of a bank account dies, the transfer process is fairly straightforward if the account has a joint owner or named beneficiary. Otherwise, the account becomes part of the deceased owner’s estate and is settled during probate.
Understanding what happens to your money after you die can help you manage a bank account after losing a loved one, and also prompt you to set up your accounts in a way that minimizes complications for your survivors down the line.
Read on for key things to know about what happens to a bank account when someone dies.
How Do Banks Discover When Someone Died?
There are two main ways a bank discovers when an account holder has died:
• Family member or beneficiary Commonly, a family member will let the bank know when one of their bank account holders has died. To inform a bank about the death of a loved one, you’ll need to present a copy of the death certificate, the deceased person’s Social Security number, and proof that you can act on behalf of the estate (such as ID showing you are the account’s joint owner or beneficiary or Letter of Testamentary to show your executor status).
• Social Security Administration Funeral directors usually report the death of a person to the Social Security Administration to ensure no more Social Security checks are issued to that individual. If any checks were sent after the person’s death, Social Security will contact the bank to get the payment returned. This is another way a bank may learn about the death of an account holder.
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Sole Owner Bank Account Rules on Death
What happens to a deceased person’s bank account if they were the sole owner of the account will depend on whether or not the account has a payable on death (POD) beneficiary.
If there is a beneficiary named, the money in the account goes to the beneficiary after the sole account owner dies. Regardless of whether there’s a will and what’s in the will, the beneficiary automatically inherits the designated account’s funds upon the account owner’s death.
A beneficiary can claim bank account funds by contacting the bank and providing valid ID and a death certificate. The bank will typically then release the funds to that person and close the account. If the beneficiary is a minor when the account owner dies, someone must be appointed to manage the money on the minor’s behalf.
What happens if no beneficiary is named on a bank account? If the sole owner of a bank account dies and no beneficiary was named, the account becomes part of the deceased person’s estate (which is the sum total of the assets the person left behind). The money is then settled during probate.
Probate is the legal process for distributing a dead person’s assets, often as outlined in their will, as well as settling their remaining debts.
Joint Bank Account Rules on Death
In most cases, the surviving joint owner of a joint bank account will have automatic rights of survivorship, which grants them ownership of the entire account balance. That person can typically continue to use the checking or savings account without any interruptions.
However, the surviving account holder will still need to contact the bank and provide a death certificate or other documentation to confirm the death and update account records. Banks generally have a process you need to follow upon an account owner’s death. The surviving joint account holder may be able to remove the deceased from the account or open a new individual account.
Recommended: 11 Financial Planning Steps to Take After a Spouse’s Death
What Happens if No Beneficiary Is Named on a Bank Account?
If the deceased person is the sole owner of the bank account and did not name a beneficiary, the executor of the deceased’s will is typically responsible for handling any assets in their estate (including money in bank accounts).
The executor will typically transfer funds contained in the bank account into an account in the name of the decedent’s estate, and they may be able to access those funds to satisfy the decedent’s debts and pay probate costs. They will then distribute any remaining funds to those named in the will.
If there is no will to name an executor, the state appoints one based on local law. After paying off any debts, the named executor will distribute the money according to local inheritance laws.
Recommended: Why Everyone Needs an Estate Plan
Tips to Avoiding Complications Upon Death
There are some simple steps you can take now to make it easier for your loved ones to sort out your affairs and access your bank accounts after you die. Here are some to consider.
• Add a joint owner. Naming a spouse or other family member as a joint account holder is a simple way to ensure someone has access to the money when you die. In most cases, the joint account holder can simply take over the funds.
• Set up beneficiary designations. Most financial institutions make it easy to name a POD beneficiary on your bank accounts. Taking a few minutes to name one can mean less headaches for your loved ones down the road. Unlike a joint owner, a beneficiary cannot access the account while you’re alive.
• Write a will. Having a will still means your assets will need to go through the probate process before they can be distributed to your loved ones. But at least it ensures that the money will go to the intended person.
• Set up a living trust. A well-set-up trust can mean that your assets don’t have to go through probate. Instead, the money can go to your heirs in a more timely manner. However, trusts can be costly to set up and maintain, and may not be worth it if you have a simple estate with few assets and potential heirs.
• Consolidate bank accounts. To make it easier for your loved ones to sort through your finances, consider streamlining your accounts. Too many checking and savings accounts, especially if the accounts are held at different banks, can make settling your affairs complicated and time consuming. Consolidating your accounts also helps ensure that no account gets forgotten.
The Takeaway
The easiest way to pass the money in your bank account to your loved ones is to name them as joint account holders or POD beneficiaries. Setting up a will is also an essential step in estate planning, but it may not guarantee that your loved ones will be able to access your bank accounts quickly.
Regardless of your choice, it’s a good idea to make some smart money moves now to make life easier for your loved ones while they are grieving.
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FAQ
Can you withdraw money from a deceased person’s account?
You can withdraw money from a deceased person’s account if you’re a joint owner of the account. Otherwise, you need to present documents to the bank to show you have a legal right to access the money in the account. For example, if you’re named as a beneficiary on the bank account, you will be required to show government-issued ID and a death certificate. If you’re the executor of the deceased’s will, you will need to present a Letter of Testamentary and a death certificate, among other documents.
How do I get money from my deceased parents’ bank account?
If you are named as the account’s beneficiary, you’ll be able to get the money from your deceased parent’s bank account by presenting certain documents to the bank, such as a government-issued ID and a death certificate. If no beneficiary is named on the account, you’ll likely need to wait until your parent’s estate is settled during probate. This is a legal process during which assets are distributed according to the deceased’s will or special laws in the absence of a will.
What happens to the bank account of a dead person?
It depends on how the account was set up. If there is a joint owner, the surviving owner will typically become the sole owner of the account.
If there are no surviving owners and a named beneficiary on the account, the funds will go to the beneficiary. If no beneficiary is listed, the account will become part of the deceased owner’s estate and settled during probate. This is a legal process during which a deceased person’s assets are distributed according to their will or special laws in the absence of a will.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Some credit facts you need to know are your credit score is based on five key factors, FICO credit scores range from 300 to 850, checking your own credit won’t hurt your score, and twelve more facts outlined below.
With all of the misleading and incorrect information about credit floating around, it’s no wonder some of us feel lost when it comes to our credit reports and credit scores. Fortunately, we’re here to help set everything straight with these simple and clear explanations.
We’ve taken the time to compile the most important credit facts you need to know to understand your credit and everything that impacts it. Just as importantly, we’re setting the record straight when it comes to credit myths that have been lingering for too long. Read on to learn everything you’ve always wanted to know about credit.
1. Your credit score is based on five key factors
Most lenders make their decisions using FICO credit scores, which are based on five key factors. That means that when you apply for a new credit card or loan, these are the primary influences on whether you’ll end up getting approved. Here are the five factors, in order of importance: payment history, credit utilization, length of credit history, credit mix and new credit inquiries.
35% – Payment history. Your ability to consistently make payments has the biggest impact on your score. Having late and missed payments is detrimental to your credit score, while a streak of on-time payments has a positive effect.
30% – Credit utilization. Your utilization measures how much of your available credit you’re using across all of your cards. By using one-third or less of your total credit limit, you could help improve your credit.
15% – Length of credit history. In general, having a longer credit history is helpful, though it depends on how responsibly you’ve used credit over time. Using credit well over time signals to lenders that you can be trusted to manage your finances.
10% – New credit. Applying for new credit leads to hard inquiries, which can negatively impact your credit score. Spacing out your new credit applications—and only applying for credit when you need it—helps your score.
10% – Credit mix. Having a variety of different types of credit—like credit cards, an auto loan or a mortgage—can influence your score as well. A diverse credit portfolio demonstrates your ability to successfully manage different types of credit.
With the knowledge of exactly how your score gets calculated, you can make smarter decisions with credit.
Bottom line: Credit scores aren’t as mysterious as they first appear, and you have control over all of the factors that determine your score.
2. Credit reports are different than credit scores
Although they are related, a credit report and a credit score are different. Also, it’s a bit misleading to talk about a single credit report or a single credit score, because the reality is that you have several different credit reports, and your credit score can be calculated in many different ways.
A credit report is a collection of information about your credit behaviors, like the accounts you have and when you make payments. Three main bureaus—Experian, Equifax and TransUnion—each publish a separate credit report about you.
A credit score uses the information in your credit report to create a numerical representation of your creditworthiness. In other words, all of the information in your report is simplified into a single number that gives lenders an idea of how likely you are to repay a debt.
Surprisingly, your credit report does not include a credit score. Instead, lenders who access your report use formulas to determine a score when you apply for credit. The most common scoring models are FICO and VantageScore, but lenders can make modifications to the calculations to give more weight to areas that are more important to them.
Bottom line: You’ll want to be familiar with both your credit reports and your credit scores, as they each play a role in helping you obtain new credit.
3. Negative credit items will eventually come off your credit report
Negative items on your credit report can cause damage to your credit score. Negative items include late payments, collection accounts, foreclosures and repossessions.
Although these items can lead to significant drops in your credit score, their effect is not permanent. Over time, negative items have a smaller and smaller impact on your score, as long as your credit behaviors improve so that more recent items are more favorable.
Additionally, most negative items should remain on your report for seven years at the most due to the regulations set by the Fair Credit Reporting Act. A bankruptcy, on the other hand, can last up to 10 years in some cases.
Bottom line: Negative items can cause a decrease in your credit score, but they aren’t permanent. Start building new credit behaviors and your score can recover over time.
4. FICO credit scores range from 300 to 850
One of the most common credit scoring models is produced by the Fair Isaac Corporation, also known as FICO. While you may hear “FICO score” and “credit score” used interchangeably, there are in fact several different scoring models, so you could have a different credit score depending on which lender or financial institution you’re working with. The score you’re assigned by FICO will usually always be in a range from 300 to 850.
Accessing your FICO score gives you the chance to have a high-level overview of your credit health. Scores that are considered good, very good or exceptional often make it much easier to get new credit cards or loans when you need them. On the other hand, scores that are fair or poor can make getting new credit more difficult.
Here’s an overview of the FICO scoring ranges:
800 – 850: Exceptional
740 – 799: Very Good
670 – 739: Good
580 – 669: Fair
300 – 579: Poor
Remember, though: credit scores are not fixed and permanent. Your score responds to factors like payments, utilization and credit history, so positive decisions now will benefit your score in the long term.
Bottom line: The FICO scoring ranges lay out broad categories to give you a sense of how you’re doing with credit—and can also help you set a goal for where you want to be.
5. The majority of lenders use FICO scores when making decisions
While there are multiple credit scoring models, the majority of lenders check FICO scores when making decisions. That means that when you apply for new credit—whether it’s a credit card, a loan or a mortgage—the score that’s more likely to matter is your FICO score.
That’s important to know, because many free credit monitoring services will show you score estimates or your VantageScore. Some credit card companies provide a FICO score, however, and you can also request to see the credit score that lenders used to make their decision during the application process.
Fortunately, credit scoring models tend to reference the same data and weight factors fairly similarly. That means if you make on-time payments, keep your utilization low, avoid opening up too many new accounts and have a consistent credit history with a variety of accounts, you’ll probably be in good shape regardless.
Bottom line: Knowing your FICO score can help you have an idea of how lenders will view your application for new credit.
6. You have many different types of credit scores
Credit scores vary based on the credit bureau reporting them and the credit scoring model used. The major credit bureaus all have slightly different information regarding your credit history. This means that these three, along with other credit reporting agencies, report several FICO credit scores to lenders to account for different information they’ve collected.
There are also different scores specific to particular industries. For example, auto lenders review different risk factors than mortgage lenders, so the scores each lender receives might differ. Although it can get confusing, the most important things to remember are the five core factors that affect your credit score.
Bottom line: Although many people reference their credit score in the singular, the truth is that there are many different types of credit scores that take into account different factors.
7. Checking your own credit won’t hurt your score
Many people believe that checking their credit score or credit report hurts their credit, but fortunately, this isn’t true. Getting a copy of your credit report or checking your score doesn’t affect your credit score. These actions are called “soft” inquiries into your credit, and while they are noted on your credit report, they shouldn’t have any effect on your score.
Hard inquiries, on the other hand, are noted when lenders look at your credit during an application process—and these can temporarily reduce your score. This is used to discourage you from applying for new credit too frequently. However, the effect is typically small, and after a couple of years the notation of a hard inquiry will leave your report.
Bottom line: You can check your own credit report and credit score without any negative effect—and we actually encourage you to do so to stay on top of your credit health.
8. You can check your credit score and credit reports for free
There are three main ways to check your credit for free. You’ll likely want to take a look at both your credit reports and your credit scores. Here’s how to get a hold of both of those:
You’re entitled to a free credit report once each year by visiting AnnualCreditReport.com, a government-sponsored website that gives you access to your reports from TransUnion, Experian and Equifax.
You may be able to check your credit score free by contacting your bank or credit card company. Additionally, many free services—like Mint—enable you to monitor your score for free. Just make sure to note which kind of credit score you’re seeing, because there are many different scoring methods.
The information you find in your credit report lays out the factors that determine your credit score. By scanning your report closely, you’ll likely find out the best strategy for improving your score—for instance, by improving your payment history or lowering your utilization.
Bottom line: Information about your credit is freely available, so take advantage of those resources to stay on top of your credit report and score.
9. Your credit score can cost you money
Ultimately, the purpose of credit scores is to help lenders determine whether they should offer you new credit, like a loan or a credit card. A lower score indicates that you may be at greater risk for default—which means the lender has to worry that you won’t pay back your debts.
To offset this risk, lenders often deny credit applications for those with lower scores, or they extend credit with high interest rates. These interest rates can cost you a lot of money over time, so working to improve your credit score can have a measurable effect on your financial life.
Consider, for example, a $25,000 auto loan. With a fair credit score, you may secure an interest rate of 5.3 percent—so you’ll pay a total of $3,513 in interest over five years. With an excellent credit score, your rate could drop to 3.1 percent, and you’ll save nearly $1,500 in interest charges over that same five-year period.
Bottom line: A good credit score can have a positive impact on your finances, and a bad score can cost you money in interest charges.
10. Canceling old credit cards can lower your score
If you have a credit card that you’re no longer using, you may be tempted to close the account entirely. Before doing that, though, consider how it could impact your credit score.
Recall that two credit factors are utilization and length of credit history. Closing an old account could affect one or both of those factors when it comes to calculating your score.
Your credit utilization could drop after closing an account because your credit limit will likely be lower. Since utilization represents all of your balances divided by your total credit limit, your utilization will go up if your credit limit goes down (and if your balances stay the same).
Your length of credit history could be lowered if you close an older account that is raising the average age of your credit.
Some people worry that having a zero balance on their credit card can negatively impact their score. This is just a credit myth. A zero balance means you aren’t using the card to make any purchases. Keeping the credit card open while not using it actually works to your benefit. You’re able to contribute to the length of your credit history, while not risking the chance of debt and late payments.
You may need to use the card every now and then to avoid having it closed. Additionally, if the card has an annual fee, you may need to close the card or ask to have the card downgraded to a version that does not have a fee. Still, if there’s a way to keep the card open, it’s often good to do so even if you don’t plan to regularly use it.
Bottom line: An old credit card can benefit your credit score even if you aren’t using it anymore.
11. You can still get a loan with bad credit
It’s true that getting a loan can be more difficult with bad credit, but it’s not impossible. There are bad credit loans specifically for people with lower credit scores. Note, however, that these loans often come with higher interest rates—or they require some sort of collateral that the lender can use to secure the loan. That means if you don’t pay your loan back, the lender will be able to seize the property you put up as collateral.
If you don’t need a loan immediately, you could consider trying to rebuild your credit before applying. There are credit builder loans, which are specifically designed to help you build up a strong payment history and improve your credit in the process. Unlike a traditional loan, you pay for a credit builder loan each month and then receive the sum after your final payment. Since these loans represent no risk to lenders, they’re often willing to extend them to people with poor credit history looking to raise their score.
Bottom line: You can get a loan even with bad credit—but sometimes it’s wise to find ways to raise your score before applying.
12. Credit scores aren’t the only deciding factor for lending decisions
While credit scores are important in lending decisions, lenders may take other factors into account when deciding whether to offer you new credit. For example, your income and employment can play a significant role in your approval odds. Additionally, some loans (like auto loans and mortgages) are secured by collateral that the lender can seize if you default. These loans may be considered less risky for the lender in certain cases because the asset can help offset any losses from nonpayment.
In many cases, your debt-to-income ratio is also an important factor in whether you’re approved for a loan or credit card. Lenders consider your current monthly debt payments (from all sources) as well as your monthly income to determine whether you may be overextended financially.
Two different people may pay $1,500 each month for student loans, a car payment and a mortgage. That said, if one individual makes $3,500 each month and the other makes $8,000 each month, their situations will be considered very differently by a potential lender.
Bottom line: Keeping your credit score high can help you secure credit when you need it, but you’ll want to stay on top of all aspects of your financial health.
13. Your credit report can help you spot fraud
Regularly checking your credit report can help you notice fraud or identity theft. If someone is using your information to open accounts, they will show up on your credit report.
If you notice an account that you did not open, you’ll want to start taking steps to protect your identity from any further damage. You may also want to freeze or lock your credit, which prevents anyone from using your information to open up more accounts.
Bottom line: Reviewing your credit report provides you an opportunity to notice when something is amiss.
14. Joint accounts affect your credit scores, but you do not have joint scores
If you have a joint account with someone else, that account will be reflected on both of your credit reports. For example, a loan that was opened by you and your spouse will show up for both of you—and will affect both of your credit scores. That said, your credit history, credit report and credit score remain separate. No one—including married couples—has a joint credit report or joint credit score.
In addition to joint accounts, you may also have authorized users on your credit card, or be an authorized user yourself. Authorized users have access to account funds, but they are not liable for debts. That means that if you make someone an authorized user on your credit card, they can rack up charges, but you’ll be on the hook if they don’t pay.
Because joint account owners and authorized users can influence credit scores in significant ways, we advise you to be careful about who you open accounts with or provide authorization to.
Bottom line: Even though joint account owners and authorized users can influence someone else’s credit, there are no shared credit reports or joint credit scores.
15. Many credit reports contain inaccurate credit information
The Federal Trade Commission found that one in five people has an error on at least one of their credit reports, and these inaccuracies can greatly impact your credit. (Also see this 2015 follow-up study from the FTC for more information regarding credit report errors.) This is why you should frequently check your credit report and dispute any inaccurate information. For example, since payment history accounts for 30 percent of your credit score, one wrong late payment can significantly hurt your score.
It’s important to get your credit facts straight so you understand exactly how different things impact your score. One of the first things you should learn is how to read your credit report so you can quickly spot discrepancies and ensure that the information reported is fair and accurate.
After scrutinizing your credit report, you can look into other ways to fix your credit, like paying late or past-due accounts, so you can help your credit with your newfound knowledge. You can also take advantage of Lexington Law Firm’s credit repair services to get extra help and additional legal knowledge to assist you.
Bottom line: Your credit report could have inaccurate information that’s hurting your score unfairly. Fortunately, there is a credit dispute process that can help you clean up your report and ensure all of the information on it is correct.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Nature Lewis
Associate Attorney
Before joining Lexington Law as an Associate Attorney, Nature Lewis managed a successful practice representing tenants in Maricopa County.
Through her representation of tenants, Nature gained experience in Federal law, Family law, Probate, Consumer protection and Civil law. She received numerous accolades for her dedication to Tenant Protection in Arizona, including, John P. Frank Advocate for Justice Award in 2016, Top 50 Pro Bono Attorney of 2015, New Tenant Attorney of the Year in 2015 and Maricopa County Attorney of the Month in March 2015. Nature continued her dedication to pro bono work while volunteering at Community Legal Services’ Volunteer Lawyer’s Program and assisting victims of Domestic Violence at the local shelter. Nature is passionate about providing free knowledge to the underserved community and continues to hold free seminars about tenant rights and plans to incorporate consumer rights in her free seminars. Nature is a wife and mother of 5 children. She and her husband have been married for 24 years and enjoy traveling internationally, watching movies and promoting their indie published comic books!
A Roth IRA can be a retirement savings tool for children as well as adults. Funded with after-tax dollars, a Roth IRA grows tax-free, so account holders won’t need to pay taxes when they withdraw money in retirement as long as the account has been open for at least five years. Plus, the money in a Roth IRA will have many decades to grow if you open it when your child is young.
And while a Roth IRA has an early distribution penalty, that penalty is generally waived for certain expenses, such as paying for qualified college expenses, if your child needs to access those funds. That flexibility can make a Roth IRA appealing.
Can you open a Roth IRA for a child? Yes! A Roth IRA for kids, called a Custodial Roth IRA, can be opened by a parent, grandparent, or other adult for a child of any age, as long as the child earns income (more on that later).
Here’s everything you need to know about a Roth IRA for kids.
What Is a Roth IRA for Kids?
A Roth IRA for kids, also known as a custodial Roth IRA, is an IRA opened by an adult (usually a parent), who manages the account until the child gets full control of it, which is at age 18 or 21 in most states.
A custodial Roth IRA for kids generally operates in the same way a Roth IRA for adults does. The account holder contributes after-tax dollars toward their retirement savings and the money grows tax-free in the account.
In order to open and contribute to a Roth IRA, your child must have earned income. 💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
Who’s Eligible for a Roth IRA for Kids?
A child of any age can have a Roth IRA for kids. However, to be eligible, a child must have an earned income. Earned income can include the compensation earned from jobs like babysitting, dog walking, or working for an employer.
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Custodial Roth IRA Rules
In addition to the standard rules for a Roth IRA, there are specific rules for custodial Roth IRAs. These rules include:
No Minimum Age Limit
A child of any age can have a custodial Roth IRA as long as he or she has earned income.
A Child Must Have Earned Income
In order to open a custodial Roth IRA, a child must have earned income. The IRS generally defines earned income as taxable income, wages, and tips. This can also include self-employment, such as yard work or babysitting. Cash gifts given to a child do not count as earned income.
There Are Contribution Limits
The contribution limit for a Roth IRA is $7,000 for 2024 ($8,000 for those 50 and older), or the total of the individual’s earned income for the year, whichever is less.
In addition, a child (or an adult on behalf of a child) cannot contribute an amount greater than the child’s earned income. So if a child earned $2,000 as a lifeguard at the local swimming pool, for example, the most that can be contributed to the child’s custodial IRA that year, including contributions from parents, is $2,000.
Certain Early Withdrawals Are Allowed
In general, you can withdraw contributions from a Roth IRA at any time without penalty. Earnings typically can’t be withdrawn before age 59 ½ without penalty except in certain circumstances. Allowable exceptions include withdrawals up to certain limits to pay for qualified college expenses, cover certain medical bills, and to buy a first home.
Eventual Conversion to a Regular Roth IRA
When the child reaches the legal age in their state (typically 18 or 21, depending on the state), the custodial Roth IRA will need to be converted to a regular Roth IRA in the child’s name.
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How to Open a Custodial Roth IRA for a Kid
A Roth IRA for kids can be opened by any adult, such as a parent or grandparent, for instance. While the child is a minor, the adult will have sole access to the account; once the child comes of age (the timing of which varies by state), the account will transfer over to the child.
As with any Roth IRA, investment options within the account can include stocks, bonds, and mutual funds.
A Roth IRA can be opened through a financial institution or brokerage firm. You can typically open the account online by providing some basic information about yourself and your child. Choosing the right institution and Roth IRA offering depends on the investor and their preferences, so be sure to do some research. 💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.
Benefits of Starting a Roth IRA for a Child
Flexibility in how to use the funds can be one benefit of opening a custodial Roth IRA as part of an investment plan for your child. A Roth IRA can provide flexibility not only for potential expenses in early adulthood — such as college expenses or buying a home — but can be an investment vehicle throughout your child’s lifetime.
Another benefit is that a Roth IRA typically gives you more control over investments than an education-focused 529 college savings plan, and it may allow you to create a diversified portfolio of different asset classes.
A Roth IRA is a gift that can keep growing, since investors can potentially maximize compounding returns to get the most out of their investment. Here’s how a Roth IRA may unlock the power of compounding: As an example, let’s say you open a custodial Roth IRA when the child is 10 years old, and contribute $2,000 annually. At a certain point, your child might take over contributing $2,000 annually.
Assuming a 7% rate of return, the account will be worth $928,000 by the time your child is 60 years old — even though the amount you and your child contributed would be $100,000 in total. In comparison, if that same money was put in a taxable savings account over the same time period, the total of the account would be approximately $515,764.
And unlike a traditional IRA, there is no required minimum distribution (RMD) on a Roth IRA once the account owner reaches retirement age. A Roth IRA also allows people to continue contributing throughout their lifetime, as long as they’re earning income.
Alternatives to a Roth IRA for a Kid
If you’re looking for other possible investments for your child, some options to consider include the following.
• Savings account: A parent can open a savings account for a child, as long as the parent is a joint account holder. Savings accounts typically have low interest rates (as of January 2024, the average interest rate for a savings account was 0.47%), so you might want to look for a high-yield savings account instead. These accounts have average interest rates of more than 4% as of early 2024.
• Savings bonds: If your child doesn’t have earned income, you may want to consider savings bonds. However, savings bonds don’t offer the same potential tax advantages a Roth IRA does since you have to pay federal income tax on the bonds when they mature or you cash them. You won’t pay income taxes on Roth IRA earnings unless you take a non-qualified distribution.
• 529 plans: These plans can help you save for your child’s education. You can typically invest the money you contribute to a 529 plan and choose from a wide range of investment options. While these plans aren’t tax deductible at the federal level, your state may offer tax breaks for contributions made to them. And funds can be withdrawn tax-free for qualified education expenses. As of 2024, money left in a 529 may be rolled over to a Roth IRA for your child, although certain conditions and limits may apply.
• UGMA/UTMA accounts: A Uniform Gifts to Minors Act (UGMA) account and a Uniform Transfers to Minors Act (UTMA) account are custodial accounts in which an adult can invest on behalf of a child. These accounts are typically used to invest in stocks, bonds, mutual funds, and so on. There are no contribution or income limits, and gifts below the annual gift threshold do not need to be reported. However, there are no tax benefits when contributions are made, and earnings are made to these accounts, and earnings are subject to taxes. When the child reaches legal age, they take over control of the account.
The Takeaway
For a child with earned income, a custodial Roth IRA may be a good way to help them prepare for their future and get started on the path to investing. A child does need to have an earned income to open a custodial Roth IRA, and contributions cannot exceed their income. If your child qualifies, a Roth IRA for kids could potentially give them years of tax-free growth on their money.
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FAQ
Can you open a Roth IRA for a child if they don’t earn income?
No. A child must have earned income — which the IRS defines as wages, salaries, tips and other taxable employee compensation, as well as net earnings from self-employment — in order to open a custodial Roth IRA.
Can you open a Roth IRA for a baby?
It’s possible to open an IRA for a baby. As long as a baby earns an income — modeling baby clothes, for instance — you can open a custodial Roth IRA for them. There is no minimum age to open a custodial Roth IRA, but the child must have earned income.
Is it a good idea to open a Roth IRA for a child?
It may be a good idea to open a Roth IRA for a child for several reasons. A Roth IRA can help a child save up for and cover certain expenses in early adulthood, such as qualified college expenses. Also, a Roth IRA typically has higher returns than a savings account. And because kids have a low tax rate now, when contributions are made, it makes sense to open a Roth IRA, which is taxed upfront. At retirement, as long as they are at least age 59 ½, they can withdraw the money tax-free.
Can I give my child money for a Roth IRA?
Yes, you can contribute to your child’s IRA. However, annual contributions to the account cannot exceed the child’s annual earned income. Also, per IRS rules, the overall amount you can contribute to a Roth IRA is to $7,000 in 2024 for individuals under age 50, or the total annual earned income, whichever is less.
What is the disadvantage of a Roth IRA for kids?
One potential disadvantage of an IRA for kids is that your child must earn an income in order to open and contribute to an account. In addition, you can only contribute the amount the child earns. So if the child makes $500 for the year babysitting, that is the most you can contribute to their custodial Roth IRA.
Can I open a Roth IRA for my 2 year old?
As long as your 2-year-old earns an income, you can open a custodial Roth IRA for them. There is no minimum age requirement for a Roth IRA for kids.
How do I prove my child’s income for a Roth IRA?
If your child receives a W-2 or 1099 form for work they did for an employer, you can use those documents to prove your child’s income. However, if they are self-employed and do work like babysitting, dog walking or yard work to earn money, you should keep receipts or records of the type of work they did, the amount they earned, when the work was done, and who it was for, as proof of their income.
What happens to a custodial Roth IRA when the child turns 18?
Once a child is of legal age, which is typically 18 or 21, depending on your state, the IRA must be converted to a regular Roth IRA in the child’s name that they then own and manage.
Do children need to file a tax return to fund their Roth IRA?
As long as their income is below the threshold that requires them to file a tax return, children are typically not required to file a tax return just because they have a custodial IRA. However, you may want to consult with a tax professional about your specific situation.
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The 10-year-old is showing an enthusiasm for the holiday season that matches her famous family’s own
North West is truly feeling the Christmas spirit.
In a series of TikToks shared by the 10-year-old’s joint account with mom Kim Kardashian, North wore a “Sia-inspired” set of pigtails made of ribbons clipped to her hair. She doubled down on the festive outfit with a Christmas sweater of a Santa flexing his muscles that said, “Welcome to the North Swole.”
The pre-teen wore feather-hemmed plaid pants and Christmas socks to complete the look, which she wore as she danced around her beautifully decorated home to TikTok remixes of Mariah Carey’s “All I Want for Christmas Is You,” Ariana Grande’s rendition of “Last Christmas,” and several of Sia’s holiday hits.
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Related: Kim Kardashian Takes Daughters North, 10, and Chicago, 5, to ‘Legendary’ Mariah Carey’s Christmas Show
Last week, North shared a closer look at some of the family home’s decor, set to a sped-up version of Ariana Grande’s “Santa Tell Me.”
The pan of the room showed numerous Christmas trees — one in all pink adorned with handbags, a few silver ones and a few in a darker gray. There were holiday treats all around the room, and a sign over the bed that read “North Pole.”
“Holiday decor- one of the kids rooms!🎄,” the caption read.
Last month, Kardashian brought North and Chicago, 5½, to see Mariah Carey’s Merry Christmas One And All! show at the Hollywood Bowl. The three were joined by Kris Jenner, Khloé Kardashian, True, 5½, and Dream, 7.
Not only did they get to enjoy the show together, but they also got to meet the Queen of Christmas and her daughter, 12-year-old Monroe, and pose for some photos afterward.
“The Queen of Christmas!!!! For the little girls very FIRST concert ever, we went to see the Queen herself, @mariahcarey !! We all had the best time, creating the most magical memories!! Thank you mommy for taking all of us! 🩵,” Khloé captioned photos from the night.
During last year’s lavish annual family Christmas Eve party, North joined the Australian singer to perform her wintry track “Snowman” as the pair stood inside a life-sized gift box.
The proud mom of four shared videos on her Instagram Story of daughter North enjoying her time in the spotlight, singing next to Sia with a microphone in hand. While Sia dressed elegantly in a long, white tulle gown with a matching headpiece, North looked chic in a shimmering black ensemble.
“@Siamusic and North performing Snowman,” Kim captioned the video, while Khloé shared similar footage, writing, “We love you @siamusic.”
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Here’s everything you need to know to help a young person kick-start their savings journey early.
November 16, 2023
Children grow up fast—so it’s never too soon for family and friends to take steps to help them reach their greatest potential. One way to do that is by opening and funding a savings account for a minor. It’s not only an opportunity to teach them the value of saving long before they’ll ever need the money—it’s also a great way to build a strong financial foundation. Over time, money from that savings account might help them pay for college, their first car, or even their starter home.
Before you open a savings account for a minor—sometimes known as a custodial account, which you’ll manage until transferring it to the child once they’re old enough to take on the responsibility—you’ll want to understand how it works. Here’s everything you need to know.
What to look for in a savings account for a minor
Opening a savings account for a child can be as basic as opening a traditional savings account that accumulates interest over time. But not all custodial accounts are created equal—and you have an array of savings account options.
As with any financial undertaking, your priorities will determine which type of custodial savings account is right for you. If you don’t want the child to be aware of the account, you might consider opening a high-yield savings account in your own name—and then have the funds unofficially earmarked for the young person.
Another option is to open a joint savings account shared between yourself and the child’s parent—a common choice among those saving on behalf of their grandkids. For any custodial account, you’ll want to ensure that the child’s parents are aware of the account. Why? The child may receive a 1099 form at tax time, potentially requiring the interest accrued on the account to be reported to the IRS.
If you want the child involved in the savings account to improve their financial literacy, you can consider a custodial account that you control until it’s handed over when the child reaches age 18 or 21 (it varies by state).
Alternatively, you can open a certificate of deposit (CD) or a money market account as a custodial account. A CD allows you to lock in an interest rate that can be even higher than that of a savings account. A money market account, meanwhile, offers you a competitive interest rate like a savings account and sometimes even a debit card for easy access to the money.
What you need to open a savings account for a minor
The first step to applying for a custodial account—such as one that grandparents might open for a grandchild—is to select the type of account you’d like to open and then contact your bank. As with any account application, you’ll need to provide personal information like your name, date of birth, address, and contact information—as well as your Taxpayer Identification Number (TIN). (Your TIN is often the same as your Social Security number.) You’ll also need to provide the child’s identifying information for a custodial account.
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How to get the most out of a savings account for a minor
Want to open a savings account for a child that will have a lasting impact? The key is to make deposits on a regular basis. A savings account can grow significantly over time through compound interest—and the best way to maximize that interest is to deposit funds into the account over the years.
Another way to make a financial gift have a true legacy is to involve the child in the account as a way to teach them about money and to help them develop smart financial habits. Take time to show them how their savings are growing by reviewing the account statements together. By including them in the account, making them part of the account process will help them understand the value of saving and the financial benefits of planning ahead.
Start helping a child build their financial foundation
Opening a savings account for a child can help them get a leg up on the future—so be sure you’re doing it right. It’s important to research all your account options, make occasional deposits to maximize interest earned, and communicate early and often about ways they can responsibly manage the money once it leaves your care.
Ready to open a savings account for a minor? Make sure you’re maximizing your savings with a Discover® high-yield online savings account.
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What Is Financial Infidelity and Why Does It Matter?
In a survey about how money matters in relationships, we asked both men and women if they’d ever broken up with someone over money. Around a quarter of respondents said they had, while around a fifth said someone had broken up with them over financial matters.
Clearly, financial factors can create friction in relationships—and that’s true whether or not someone breaks up over these issues. According to a poll conducted by the Association of International Certified Professional Accountants, almost 70% of Americans who were married or living with a partner said they’d fought about money with their significant other within the past 12 months.
With money a stressor in relationships, it’s not surprising that financial infidelity sometimes occurs. Find out more about financial infidelity and the role finances play in relationships below.
In This Piece
How Are Finances Important to Relationships?
People often shy away from the importance of finances in a marriage or other relationship because they don’t want to seem materialistic or as if they’re putting money and things before their significant other. In reality, though, finances are critically important because they can provide stability—or take it away, as the case may be. Being honest with each other about finances and working together transparently for future financial goals builds trust and helps the entire marriage or relationship succeed.
Some things that might be important to financial fidelity in a relationship include:
Being honest about income. Even if you don’t put all your money in a joint account together, being honest about your incomes can be important. Hiding that you make substantially more, so you can keep money to yourself is a form of financial infidelity in marriage. Instead, consider coming clean about the income and working together to come up with a fair way to treat the budget if you don’t want a complete “what’s mine is theirs” relationship.
Working together on budgeting. Create a shared budget and stick to it. This is especially important if you put all your funds together and treat them as the same. If you don’t do that, decide what expenses you’ll cover together, and always honor your part of that agreement before you spend on or save for yourself.
Maintaining transparency about spending. Be honest about what you spend and how, especially if you’re sharing accounts. Don’t hide packages or things you bought from each other or downplay what something costs because you know the other person might be upset about it. When making big purchases, talk to each other beforehand.
Deciding together on frivolous expenditures. Make a budget for frivolous spending or a no-questions-asked cash budget. For example, maybe you each get $50 a week in cash to do whatever you want with. If you like expensive coffees or want to eat out and your spouse doesn’t see the value in that, you can use your fun money for it without feeling like you have to hide it.
Agreeing to debt and other major decisions together. Don’t incur debt the other person doesn’t know about, and make large financial decisions together whenever possible.
What Is Financial Infidelity?
Financial infidelity occurs when you lie about money matters to each other in a relationship where there’s an expectation that you won’t. Usually this is possible when a couple shares finances, but it’s also possible even if you keep your finances separate and are dishonest about things.
A few examples of financial infidelity include:
Incurring debt and hiding it from the other person
Not paying a bill but telling the other person you did
Buying something in secret you know the other person wouldn’t approve of, especially if it’s expensive
Hiding money from the other person, such as opening a savings account in your name only to funnel money into
Signs of Financial Infidelity
If you’re worried that financial infidelity is at play in your relationship, consider the following common signs:
The other person gets anxious or angry, seemingly for no reason, when the subject of money comes up
There are larger-than-normal cash withdrawals on any of your accounts
You haven’t seen a credit card or bank statement in a while and the other person makes excuses whenever that comes up
The other person makes it difficult or impossible for you to log into online credit card or bank accounts
The other person always tries to get to the mail before you and doesn’t show you all the mail
You find potentially expensive items in your home, and you’re not sure where they came from or when they were purchased
You or your spouse is denied credit based on high debt-to-income ratios or credit utilization, but you weren’t aware that you had a lot of debt
Does Financial Infidelity Signal the End of Your Relationship?
Whether you should break up with someone or ask for a divorce based on financial infidelity is a personal choice, and one that probably should take into account many other factors. According to our survey, men are slightly more likely to initiate a breakup over financial issues, with almost 30% saying they had, compared to close to 23% of females.
Age also seems to play a role. Almost 30% of those aged 25 to 34 say they’ve broken up with someone over finances, and just over 30% of those aged 35 to 49 said the same. For people aged 50 to 64 and 18 to 24, the number drops to less than 15%, and for those over age 65, only around 6% said they had broken up with someone for these reasons.
Avoid Financial Infidelity
Couples know they have to work on issues like communication and intimacy. But they often don’t realize they should put the same effort into working on finances together. Start today by being open and honest about money. Consider signing up for your free credit scores together at Credit.com, so you can see where you both stand.
Methodology
This survey was conducted for Credit.com using Suzy. The sample consisted of a total of 1,019 responses per question and is not statistically representative of the general population. This survey was conducted in September 2022.
Canceling your credit card is as simple as paying off your remaining balance, collecting any unused rewards and contacting your card issuer to close the account.
If you’re wondering how to cancel a credit card, you should know that you risk harming your credit score and losing out on credit card rewards. As stated by Equifax®, one of the three major credit bureaus, closing your credit card not only impacts the length of your credit history, but it also affects your credit utilization ratio. These two factors are a combined 45% of your overall credit score.
To help you feel more confident making the decision about whether to cancel a credit card, we’ll go over reasons to close your credit card account, how to easily cancel one, as well as some simple steps to protect your credit score. We’ll also discuss how you can avoid leaving free money on the table when you close the account.
Table of contents:
Should you cancel a credit card?
Ideally, you shouldn’t cancel your credit cards unless necessary. Tanza Loudenback, CFP and author of multiple finance books, says, “It pays to hang on to old ones, even if they’re collecting dust.” As you’ll learn, closing your account can lead to a drop in your credit score, which can make it difficult to open new lines of credit.
Closing a credit card shortens the length of your credit history, changes your credit utilization ratio, and may also affect your credit mix by reducing the various types of credit you have access to—all three of these factors weigh on your credit score.
Also keep in mind that if you’re not using a credit card, the card issuer may send a notice that they’re closing the account due to inactivity. If you’re not being charged any fees on the card, it may be a good idea to negotiate with the issuer to keep the card open. One way to do this is to assure them you’ll start using it monthly, and you can make small charges with groceries and gas or whatever you choose.
Reasons to cancel your credit card
There are, of course, situations in which canceling your credit card may be a good idea, including:
Fees: Some cards come with monthly or annual fees. If you’re not using the card, you can save money by closing the account.
Separation or divorce: If you’re separating and have a joint account, your credit will still be attached to your ex-spouse or partner, which means you’re liable for charges they make.
Temptation: If you’re trying to break a spending habit, once you pay the card off, you may want to close the account to avoid the temptation of spending.
How to cancel a credit card in 7 steps
Now that you know when it may be time to close a credit card account, follow the below steps to learn how to cancel a credit card properly. Doing so will help you avoid a larger dip in your score than necessary while also making sure you’re receiving all the benefits possible.
1. Pay off the balance
Before closing your account, ensure the balance is paid in full. Leaving a balance on the account can lead to derogatory marks on your credit score.
2. Cancel recurring payments
If you have recurring payments, you’ll want to cancel them before closing the account. Be thorough when you check so you don’t accidentally miss a bill payment. The best way to do this is to go through one of your monthly statements to see what was charged.
3. Redeem your rewards
Many credit cards have rewards in the form of cash back or points for different stores and companies. You can redeem your reward points, and sometimes you can use them toward your remaining balance.
4. Call the card issuer or visit the website
Oftentimes you can cancel your credit card account through the issuer’s website, but it may be a good idea to call and follow up as well.
5. Follow up in writing
When canceling credit cards or doing anything that may affect your credit score, it’s smart to follow up in writing. This gives you documentation just in case the account continues to show up on your credit report.
6. Check your credit report
Within 30 days after closing your credit card account, check your credit report to ensure the account no longer appears. If it does, you’ll need to contact your card issuer to resolve the situation. If they’re unable to help, you’ll need to contact the three credit bureaus with your documentation of closing the account.
7. Destroy the card
It’s important to protect yourself from identity theft or someone trying to make charges on your card, so once you’ve completed the previous steps, you can physically cut up or shred your old card.
Does closing a credit card hurt your credit?
Closing a credit card account can affect your credit score for up to 10 years, according to Experian®. This happens because it changes three of the five factors that contribute to your overall credit score.
The FICO® scoring model is the most common form of credit scoring, and this is how they weight their scores:
Payment history: 35%
Credit utilization: 30%
Credit age: 15%
Credit mix: 10%
New credit: 10%
How canceling a credit card affects credit utilization
Credit utilization is the ratio of how much you owe versus your max limit of all your lines of credit. For example, if you have two credit cards with a max limit of $1,000 each and one with a max limit of $3,000, your total max limit would be $5,000. If you owe $1,000 between the three cards, your utilization ratio is 20%.
Capital One recommends keeping your utilization ratio at 30%or less. Using the previous example, a 20% utilization ratio would be helpful for your credit score. If you were to have an outstanding balance of $3,000, your utilization would be at 60%, which is much higher than the ideal 30% or less. With a high utilization ratio like this, it can harm your credit score.
How closing a credit card affects your credit mix
Credit mix refers to the various types of lines of credit you have. The primary types of credit according to FICO include:
Credit cards
Retail accounts
Installment loans
Mortgage loans
To maximize your credit score, you’ll want a well-rounded mix of these lines of credit. And when you close a credit card, your credit mix will be reduced.
How closing a credit card affects your credit age
Creditors like to see that you have experience managing lines of credit, which is why the age of your credit card accounts is so important. This scoring factor is usually the average length of all your lines of credit. If you close an old account, this will lower the average age, lowering your overall credit score.
FAQ
There’s more to know about canceling your credit card, so here are some answers to the most frequently asked questions.
Should I cancel unused credit cards or keep them?
It’s typically a better idea to keep your unused credit cards rather than cancel them so you don’t lower your credit age. The most common reason to cancel an unused card is when you’re being charged monthly or annual fees.
Do negative marks from a closed credit card stay on my report?
Yes. Closing a credit card doesn’t erase your credit history. If you have late or missed payments on a credit card, those will continue to stay on your credit report for up to 10 years.
Can I cancel a credit card online?
Yes. Many credit card companies allow you to cancel your card through their website.
What if my credit card has a balance when I close it?
You will still owe any balances remaining on your credit card, so it’s a good idea to ensure the balance is paid in full before you close it to avoid any missed payments that could hurt your score.
You can still close the account while you have a balance, but you’ll still be responsible for it, and it will continue to accrue interest. It can be easy to forget about the outstanding balance after closing the account, so it’s best to pay it off before closing the account.
How to repair your credit after closing your credit card
There are a few reasons you may need to close your credit card account, such as fees on an unused card or going through a separation or divorce. Although your credit score will likely be affected negatively, there’s still a lot you can do to rebuild your credit score.
Here at Credit.com, we have a variety of services like our ExtraCredit program that can help you work to repair and rebuild your credit score. We’ll also provide you with a free credit report card that can help you make a plan to improve and maintain your credit score. Sign up today to get started on your credit-building journey!
Does being an authorized user affect your credit? Well, becoming an authorized user can help you build your credit under the right circumstances. Before you agree to be an authorized user or add an authorized user to your account, it’s important to understand the potential risks and benefits. This article provides more information about how adding an authorized user works and how it could impact your credit.
In This Piece
What Is an Authorized User?
An authorized user is a person who has the authority to use another person’s credit card account. In many cases, the authorized user receives a credit card in their name. Unlike co-signers and joint account holders, authorized users aren’t financially responsible for making payments.
Typically, cardholders only add someone they trust, such as a child or significant other, as an authorized user. There are a few reasons a cardholder might want to add an authorized user to their account, including:
To help the person build their credit history
To make it easier for the authorized user to make payments when the cardholder isn’t available
To allow someone to make purchases on the cardholder’s behalf
The primary reason a person wants to become an authorized user is that they’re unable to secure a credit card on their own. For example, a child may not have the established credit to get a credit card, so a parent adds their child as an authorized user under their account.
Authorized Users Versus Joint Accounts
Authorized users aren’t the same as joint account holders. Authorized users can charge money to your account, but they can’t add other authorized users and they can’t dispute charges. They also can’t request credit limit increases, transfer balances, or close your account.
In contrast, joint account holders can do all of those things and more. Joint account holders are jointly liable for the account, and they’re also jointly liable for repayments.
How Do Authorized Users Work?
The process of adding an authorized user to your account varies between credit card companies. Some credit card providers may have age and other requirements that must be met before you can add an authorized user. You may also be able to set limits on how much the authorized user can charge to your credit card.
You’ll need basic information about the person you’re adding, such as name, date of birth, and Social Security number. You should contact your credit card company directly to see how this process works.
Once the application process is complete, the authorized user receives their card. They can use it just like any other credit card. Depending on the specific credit card company and your preferences, you may be able to give the authorized user access to your account information so they can track packages and report a lost card, errors, or potential fraud. Keep in mind that giving the authorized user access to your account may also allow them to see your purchase history and redeem special rewards.
It’s important to note that authorized users don’t receive credit card bills and aren’t responsible for making payments. This responsibility lies solely with the cardholder.
Can I Build Credit as an Authorized User?
For a long time, authorized users were able to build credit by “piggybacking” on the primary account holder’s own good credit record. Many modern scoring models no longer recognize this loophole—but a few still do. If you’re hoping to build credit by becoming an authorized user, you need to do two things:
Check if the card company reports authorized users to credit bureaus.
See if authorized users are reported as if they’re account holders.
If the account holder’s card company does report authorized user activity, you’ll see an individual account on your credit report. Providing the primary cardholder continues to make payments and handle the account responsibly, you’ll likely benefit from the listing.
Can Adding Authorized Users Hurt Your Credit?
Before adding an authorized user to your credit card account, you need to ask yourself several questions.
Does adding an authorized user affect my credit?
Will adding an authorized user hurt my account?
Will adding an authorized user help their credit?
The answer to these questions depends a lot on your specific credit card company. Not all credit card companies report authorized users to the credit bureaus. If your credit card company doesn’t report authorized users, adding them to your account will have no impact on their credit score. If, on the other hand, your credit card company does report authorized users, it can help them start building up credit.
Either way, adding an authorized user to your credit card account shouldn’t automatically effect your credit history. However, there are several ways taking this step could hurt your credit score over time.
First, if the authorized user charges too much to your credit card, you may have difficulty making your monthly payments. Payment history makes up 35% of your FICO score. So if you can’t make your monthly payment because of charges accrued by an authorized user, your credit profile, and wallet, could take a hit. If possible, set limits for how much your authorized user can charge to your credit card account. This step can help to reduce the risk of overspending.
Secondly, additional charges to your credit card account can also increase your credit utilization ratio. The more you charge to your credit card, the higher your credit utilization ratio is. Your outstanding debt accounts for about 30% of your overall credit score. You should try to keep your debt ratio under 30%.
What if an Authorized User Misuses Their Card?
Let’s imagine you are the primary account holder, and your teenager is the authorized user. What would happen if they decided to buy a new wardrobe without telling you? The answer is simple—you’d be on the hook for the whole amount. Your wallet could take a serious hit.
Does Removing an Authorized User Hurt Their Credit?
If your authorized user doesn’t behave, you can remove them from your account pretty quickly. At that point, they can no longer use their card and can’t charge any more money to your account.
Credit age history makes up 15% of your credit score. If your credit card company previously reported the authorized user as an individual account holder and they suddenly get removed from your account, the removal might look like a closed account, regardless, it will likely be removed for age calculations. In that case, the formerly authorized user’s credit score could dip.
Does Being an Authorized User Affect Your Credit?
Becoming an authorized user could affect your credit if the credit card company reports your status to the credit reporting agencies. If the credit card company doesn’t report your authorized user status, taking this step won’t impact your credit score at all. However, you’ll still have the benefit of charging purchases to a credit card.
How being an authorized user impacts your credit depends largely on the cardholder’s payment history. If the cardholder has a strong history of making on-time credit card payments, it could help you build your credit and increase your credit score. On the other hand, if the cardholder has frequent missed or late payments, it could hurt your credit score.
It’s important to understand the cardholder’s credit history before agreeing to become an authorized user. It’s also important to repay the cardholder for any purchases you make as quickly as possible. This step will help the cardholder make their payments on time.
How Long Does It Take an Authorized User to Show Up on Credit Report?
It takes about 30 days for your authorized user status to reflect on your credit report. However, not all credit card companies report authorized users to the credit bureaus. In these cases, your credit report may never show that you’re an authorized user.
What to Consider About Authorized Users
If you want to build your credit by becoming an authorized user, start by talking to friends and family members you trust. Be sure the cardholder has good credit and makes on-time payments.
If a friend or family member agrees to add you as an authorized user, it’s important to set clear boundaries right from the start. For example, determine your specific credit limit right away and whether the cardholder wants you to ask for permission before using the card.
You also need to make a clear payment agreement. Determine exactly how much you’ll pay each month and the date monthly payments are due. Make sure you create a budget so you know exactly how much you can afford to pay each month. Also, be sure to track your purchases so you know exactly how much you owe.
It’s crucial to have this agreement in place before becoming an authorized cardholder. This agreement allows you to know exactly what’s expected of you. It can also help you determine if this is the right option for you.
Four Tips to Bear in Mind
Set clear spending rules before you make family members authorized users.
Talk to prospective authorized users about credit, including credit utilization.
Set up text message alerts to make sure you know when authorized users make purchases.
Remove authorized users if they don’t stick to the rules you make.
Simply Adding Authorized Users Won’t Hurt Your Credit—but Be Careful
Ultimately, authorized users aren’t a threat to your credit unless they misuse your credit card account. Many authorized users coexist happily with main account holders for many years. Problematic authorized users, unlike joint account holders, can be easily removed.
If you’re thinking of adding an authorized user and you want to keep track of your credit, why not subscribe to ExtraCredit from Credit.com? ExtraCredit is great if you’re an authorized user—tools like Build It can help you strengthen your credit profile by letting you add rent and utilities as trade lines to your credit history.
Insurance offers a vital safety net, protecting you against financial loss if something bad happens. One unexpected event — like a car accident, an emergency room visit or a storm that damages your home — could easily wipe out your savings. Insurance helps you manage the risk of a financial disaster. Let’s look at some basic types of insurance and when you might need them.
Medical insurance
Medical insurance helps cover your expenses if you’re hit with a big health-related bill. It’s also frequently used to pay for routine preventive care. The basic types of medical insurance are:
Health insurance
Even if you’re young and healthy, you need health insurance. If you don’t have insurance and you’re not covered by a program like Medicare or Medicaid, you’ll likely have to pay 100% of your health care costs out of pocket. Hospitals typically charge uninsured patients anywhere from two to four times what they’d charge an insurance company or public program.
Often, uninsured people must pay upfront to receive care.
Many people receive health coverage through their jobs. If you don’t work for a company that offers health insurance or you’re self-employed, you can shop for a plan on the Health Insurance Marketplace using healthcare.gov.
Dental insurance
Dental insurance pays for most preventive and basic dental care, like cleanings, checkups and fillings. If you need a major procedure, like a root canal, many plans will only pay around 50%. Still, dental insurance is often worth the cost if you take advantage of preventive care.
Vision insurance
Vision insurance pays for a portion of basic eye care, including eye exams, eyeglasses and contact lenses. If you don’t wear eyeglasses or contact lenses and only require an occasional eye exam, vision insurance may not be worth the cost.
Property and casualty insurance
Property insurance protects the things you own, like your house or car. Casualty insurance protects your assets in case you’re found legally liable for an injury or property damage. These two types of insurance are frequently lumped together in a single policy.
Homeowners insurance
Homeowners insurance helps you pay for repairs and replacement costs if your home is damaged by certain disasters, like a fire, or you’re the victim of vandalism or theft.
Most policies help pay for temporary housing if you’re unable to live in your home due to a covered loss. Your homeowners insurance can also help pay to defend you or cover medical bills if someone is injured on your property.
Though homeowners insurance isn’t required by law, your lender will probably require it if you have a mortgage. Even when it isn’t required, you don’t want to skip homeowners insurance due to the exorbitant costs of a major repair or rebuilding your home altogether.
Renters insurance
Your landlord probably has insurance on the property you rent, but most landlords’ policies only cover damage to the building and not your personal belongings. Renters insurance helps pay for the cost of replacing your belongings, like your furniture, clothing and electronics. It also offers liability protection and assistance with temporary housing costs if your unit becomes uninhabitable.
Some landlords require renters to have insurance. Even when it isn’t required, renters insurance is a wise choice, and it may cost less than you expect. The typical monthly premium for renters insurance ranges from $8 to $21, depending on your state.
Auto insurance
An auto insurance policy can financially protect you in the event of an accident, or if your car is stolen. Almost every state requires a minimum amount in order to drive legally. These minimum requirements include liability insurance, which pays for injuries or property damage you cause if you are at fault in an accident.
Most insurance companies offer optional types of car insurance coverage that can provide additional financial protection. For example, many insurers offer rental reimbursement, which pays for a rental car if yours is in the shop for a covered claim.
Pet insurance
Any pet parent who believes they wouldn’t be able to afford a major vet bill out of pocket should shop for pet insurance. Veterinary bills can add up quickly when your furry friend is sick or injured. For example, the cost of canine intestinal blockage surgery could be anywhere from $800 to $7,000, according to the Canine Journal.
Flood insurance
Most water damage caused by flooding isn’t covered by a standard homeowners insurance policy. That’s a serious concern for homeowners given recent severe weather events like Hurricane Ian in Florida, record-breaking rain in Montpelier, Vermont, and historic flash floods in Kentucky. You’ll need separate flood insurance to cover these types of damages.
Your lender will require flood insurance if you live in a FEMA-designated “special flood hazard area.”
But even when it’s not mandatory, homeowners should assess their flood risk to determine if a separate policy makes sense.
Umbrella insurance
An umbrella insurance policy kicks in if you’re responsible for damages or injuries that exceed the limits of your other policies, like homeowners and auto insurance. It often pays for your legal costs as well. Umbrella insurance isn’t legally required, but if you own property or have significant assets, consider an umbrella policy for additional protection.
Other types of property and casualty insurance
You may need other types of property and casualty insurance based on your situation. For example, earthquake insurance is probably necessary if you live near a fault line, as standard homeowners and renters policies don’t cover earthquake-related damage. If you own a boat, snowmobile, golf cart or all-terrain vehicle, you’ll need power sports insurance. Landlord insurance is a must if you own a property that generates rental income.
Life insurance
Would your death place a financial burden on others? If the answer is yes, then you need life insurance. If you’re not sure, ask yourself the following:
Does your partner or spouse rely on your income?
Do you have children or other dependents who rely on your income?
Could someone else inherit your debt, like a co-signer or joint account owner, or your spouse if you live in a community property state?
Would your funeral place a financial burden on loved ones?
Do you own a business that employs people that would likely fail in your absence?
If you answered yes to any of these questions, life insurance is a must. In most situations, term life insurance will be sufficient to meet your needs.
Disability insurance
A 20-year-old worker has about a 1 in 4 chance of becoming disabled before reaching retirement age.
Qualifying for Social Security Disability Insurance (SSDI) can be difficult, given that only 21% of initial claims were approved on average between 2010 and 2019.
Disability insurance replaces part of your income if you become unable able to work due to an illness or injury. Many employers offer disability insurance, but if you’re self-employed or your employer doesn’t offer coverage, consider buying individual short-term and long-term policies.