Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a discussion of how last week’s interest rate increase is likely to affect your finances.
Then we pivot to this week’s money question from Jack, who left us a voicemail: “Hey NerdWallet team, this is Jack. My question is whether or not it’s a good idea to add my brothers and sisters as authorized users on my credit card. I myself have a fairly good credit score; it’s about 799. I have one older brother and eight younger brothers and sisters. None of them have opened a line of credit yet, so I believe that would mean they don’t have a credit score. I just want to make sure that they are set up so when they’re trying to look for an apartment or get some kind of a loan down the line that they have a credit score to build off of.”
“So my question is if I can add brothers and sisters to my line of credit, if there are any drawbacks to doing so. And is there a limit to how many I can add? My older brother is 27, and then my younger brothers and sisters are ages 23 through 5. My parents have been very diligent while I was growing up to teach us to avoid debt and to be very wary of credit cards and to use cash whenever we can. … Thank you all.”
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The Fed’s recent rate hike has been in the news, but its impact on you depends on your financial goals. If you’re a homeowner or hope to be, a lot of the rate hike (and expected rate hikes) has already been priced into mortgages. If you have a maximum monthly payment in mind, you will need a lower price range to hit it. And if you are thinking about cash-out refinancing, you might want to check out a home equity line of credit to see if that makes more sense now.
As for credit card debt, an additional quarter of a point won’t make a huge difference in payments. However, this could be a good time to pay off debt with a 0% intro rate or a fixed-rate loan. If you’re a saver, the rate increases are much better news. The high-yield savings accounts, which have not lived up to their name recently, will pay better rates.
Good credit can minimize how much interest you’ll have to pay wherever interest rates go, because people with good credit are offered lower rates. And teaching kids about how to achieve and maintain good credit can set them up for living independently. One way to do that is by making someone an authorized user on your credit card. This allows them to make purchases on your account without being responsible for paying the bill.
Authorized users can also share the credit history of the primary user. Credit newbies in particular can benefit from generous credit limits and a history of on-time payments.
Responsibly adding someone as an authorized user should involve helping them understand credit and how to manage it. Some cards allow you to set spending limits for authorized users, which can provide some guardrails for people new to credit. You don’t have to give the authorized user a physical card for them to benefit, but if you choose to do so, make sure you are confident that they will take care of it and use it as agreed.
- Know the benefits of authorized users. Making someone an authorized user on your account can help them establish — and learn how to use — credit.
- Understand the potential drawbacks. You are on the hook for what an authorized user charges to an account; or, if the authorized user lends the card to someone, you are on the hook for what that person charges. You may also lose some financial privacy if authorized users can check purchase history.
- Learn other ways to build credit. Secured cards, “starter” credit cards and credit-builder loans can also help establish a credit profile.
Sean Pyles: Welcome to the NerdWallet Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I’m Sean Pyles. This episode, my co-host Liz Weston and I answer a listener’s question about whether you can help your family by making them authorized users on your credit cards. But first, in our This Week in Your Money segment, I’m talking with mortgage Nerd Holden Lewis, personal finance Nerd Kim Palmer and credit cards Nerd and occasional Smart Money co-host Sara Rathner about how the rate hike could affect different parts of your financial life. Welcome to the podcast, everyone.
Kim Palmer: Thanks for having us.
Sean: I think this is the most Nerds we’ve ever had on the podcast at one time. And I’m tempted to find some sort of name for a group of Nerds, like how a group of owls is called like a parliament or a group of beavers is called a colony. Would we just be a wallet of Nerds? Is that too corny?
Sara: I was actually thinking the exact same thing.
Holden: No, a magnet school of Nerds.
Sean: I like that. OK. Awesome. Well, thank you all for being here, and Holden, let’s start with you. Can you give us a rundown of what the rate hike might mean for homeowners and would-be homeowners?
Holden: Sure. Let’s talk about home buyers first. Mortgage rates, they tend to go up before the Fed increases short-term interest rates. And that’s what happened this year, because mortgages, they tend to move up and down with the 10-year Treasury note. Mortgage rates started this year around 3.25%. And by mid-March, the 30-year mortgage was 4.5%. And it was only after that that the Fed raised short-term rates by one quarter of a percentage point.
So what does that mean for home buyers? Well, basically the mortgage market is already priced in most of those expected Fed rate increases for the year, and you can’t lock a mortgage rate till you found your home and had the offer accepted. So here’s what’s happening and what’s going to happen. Some people are going to discover that they have been priced out of the home they wanted because of rising mortgage rates. Now, if you’re shopping toward the top of your price range at a given rate, well, if the rate rises and you’re not aware of it, you might make an offer on a house and then discover, oh, the rate went up so much that we can no longer afford the monthly payments.
So my advice is, I guess, basically keep an eye on mortgage rates, don’t shop at the very tippy top of your price range and just make sure that you can afford that home when you make the offer.
Sean: Yeah. Well, the unfortunate reality of interest rate hikes is that they are supposed to price people out of the market.
Holden: It really does. Some people, they’re going to drop out of the bottom of that market. Other people, they might just simply rearrange their price range. Maybe they’re looking at houses from $400,000 to $425,000, and mortgage rates go up half a percentage point, so now they have to look at $380,000 to $405,000.
Sean: One thing you mentioned early on, I think is really important to just underline, which is that mortgage rates follow the 10-year Treasury note typically, not the Fed rate hikes. So even though the Fed is expected to raise rates later on in this year, again, it seems like the mortgage ra
tes might be fairly steady because of that 10-year Treasury note is that right?
Holden: Mortgage rates, they’re expected to keep rising, not nearly as sharply as they did so far this year. One and a quarter percentage points in 2 1/2 months — that’s really, really fast by historical standards. Probably by the end of the year, they’re going to go up another one quarter to one half percentage point. So till the end of the year, crossing fingers, the rate increases are going to be a lot more gradual.
Sean: OK. And similarly it’s expected that home prices will not be skyrocketing as much as they have been in the past couple of years, right?
Holden: Oh, I’ve been talking to people who say, “Oh, well, home prices went up 20% last year. They’re going to go up 4% this year, 5%, maybe.” Six percent to nine percent, someone else guessed. So yes, home prices are expected to go up a lot more slowly this year. And a lot of it has to do with those rising mortgage rates, knocking some people out of the market. And therefore just having fewer bids on houses and just less overall competition.
Sean: That’s, I guess, one silver lining to this whole process.
Holden: It is, you know, especially if you’re ruthless and you’ve decided that you’re not going to have sympathy for the people who got priced out.
Sean: Yeah, if you have the cash might as well spend it, I guess.
Sean: All right. So what about if you are a homeowner right now: How will the Fed hike affect you?
Holden: If you’re already a homeowner and you have a fixed-rate mortgage, don’t worry about that part. That fixed-rate mortgage won’t go up. But rising mortgage rates might make it no longer worthwhile to refinance. So here’s the deal: A lot of people, they pay for their home renovations by doing cash-out refinances. And it works this way. Let’s say you owe $200,000 on your mortgage, and you refinance for $250,000 — so, $50,000 more than you owe you. You take out that $50,000 as cash, which you can use to pay for renovations. And that’s a cash-out refinance. So with mortgage rates going up, I think more people are likely to forget about cash-out refinances, and they’re going to get home equity lines of credit instead. And those are home equity loans that work like credit cards. So you can charge against your HELOC (that’s what they’re called), pay some or all of that balance down, and then charge against it again to pay for, hopefully, home renovations. But you could do a vacation on a HELOC if you wanted to.
Sean: Maybe not the best use of it, though.
Sean: But HELOCs are variable interest rates.
Sean: So even though we can access them because of these rate hikes that are expected, they’re going to be getting more expensive.
Holden: They definitely are. They are pegged exactly to what the Fed does. So every time the Fed raises rates, the rates on home equity lines of credit will go up by the same amount. So HELOC rates, they’re probably going to go up at least one and a half percentage points this year. They’ve already risen that one quarter of a percentage point because of the Fed’s rate increase on March 16.
So even though HELOC rates are higher than mortgage rates on cash-out refinances, it might be cheaper in the long run to borrow against a home equity line of credit and then just pay that balance down quickly — essentially treating it like a credit card. You don’t want to carry a credit card balance for 20 years.
Sean: Yeah, especially in a climate of interest rates climbing.
Holden: That is exactly right.
Sean: All right, Kim, let’s turn to you now. How do you expect the rate hike to impact folks’ day-to-day finances?
Kim: Well, I think what’s most challenging for consumers is that just as inflation is making a lot of everyday items more expensive — we’re paying more for trips to the grocery store and gas — at the same time, some of the bills we pay like credit cards, some kinds of student loans, those will also go up. And so it means that for consumers, we’re really getting squeezed in a lot of different ways. There is a tiny silver lining or maybe more substantial silver lining if you’re a big saver, but that silver lining is that in high-yield online savings accounts, we do expect those yields to go up as well. And so if you do have money in savings, that will work in your favor.
Sean: Well, the high-yield accounts have hardly been high yield for quite a while now. So I think this is a nice return to form for these accounts that promise high yields, but haven’t really been delivering.
Kim: That’s right. We’ve been in such a low-interest environment for so long, it’s almost easy to forget what it feels like to actually have your money earning something as it’s sitting in a bank account; but it is something to look for. And it really means that for consumers, it’s more important than ever to shop around for a high-yield savings account. Make sure your money is in a place where it’s at least earning as much as it can be.
Sean: Similarly, certificates of deposit are also going to yield better returns than they have in recent years. So that’s something to consider as well if folks have a good amount of savings that they know they won’t really need to touch for a year or two. This way they’ll be able to get a guaranteed return.
Kim: That’s a great point, for sure.
Sean: Any other ways you think folks can begin to plan and mitigate this interest rate hike in their day-to-day finances?
Kim: Really, I mean, the most important way you can protect yourself — and I know Sara will go into this in more detail — but it’s really all about paying off any high-interest credit card debt that you have. I think that’s really the biggest step you can take. And then secondly, just shopping around for a higher-yield savings account, just to make sure your money’s working for you. Those are the two probably most important steps you can take in terms of just protecting your everyday finances.
Sean: All right, Sara, you are up. Can you tell us what the rate hike might do to credit cards and debt?
Sara: So credit cards are already beginning to increase their interest rate ranges, which is the range of APR that you might be charged depending on your financial situation. And credit cards have variable interest, which means that even if you have an existing credit card, you are not locked into any particular interest rate. It will adjust as the Fed adjusts interest rates, too. Honestly, as scary as this news sounds, it actually isn’t going to make that much of a difference in the total amount of credit card interest you might pay over time.
Sean: At least this first rate hike.
Sara: Yeah. There are going to be several others this year. So it’s going to get more substantial over time, but at least for now, you’re not going to notice too much. Like here’s an example. So if you had a credit card that charged 17% APR, and you have $2,500 in debt on that card, and your plan is to pay it off in about 2 1/2 years, over time, you’re going to pay $577 in interest. And if your interest rate increases a quarter of a percent to 17.25%, you’ll pay just $11 more in interest.
So not exactly something to lose sleep over, but here’s what I want you to focus on. You already owe more than $500 in interest. That’s expensive. So if you have credit card debt, let this light that fire under your you-know-what, and make this the year that you make getting out of debt one of your top priorities, if you’re able.
Sean: Right, and we know it’s not as simple as just getting out of debt. We’ve talked about this a good amount. And so I think folks who are struggling with credit card debt might benefit from contacting a nonprofit credit counseling agency. They can offer free budgeting help and help you find a path for resolving your debt, because now is really the time to do it before this debt gets even more expensive.
Sara: Right. And just because you have credit card debt today, your bills don’t stop just because you owe money. You’re going to keep owing money on the things that you need in life and the things that you want to do. And so your debt might balloon over the next couple of years, and it will just get that much harder to pay it down.
Sean: Especially in a climate where everything else is getting more expensive.
Sara: Exactly. And in addition to working with some sort of budgeting counselor, which is a great idea, other things exist that can help you save money on interest, especially at a time when interest is going up. First of all, balance transfer credit cards are an option if you have good or excellent credit.
Sean: And you think those will stick around despite the rate hikes?
Sara: Yes. They were harder to find at the onset of the pandemic, because their availability is also tied to economic performance and how risky it is to lend consumers money, but they have been coming back. So there are more offers available than there have been in the past year and a half. And so if you qualify, it could be a great way to avoid interest for a year or more on a credit card balance. But you are limited to the credit limit that you’re assigned by that card. So the amount of money you can transfer over and save interest on might be limited. It might be lower than the total debt you have.
Another thing to think about if you don’t qualify for a balance transfer credit card, or you don’t qualify for one with a high enough credit limit, would be some sort of debt consolidation loan, or personal loan. It’s not going to be 0% APR, but it might be significantly less interest than you would pay on your credit card.
Sean: OK, that makes sense. Any other general thoughts around what the rate hike might do for folks?
Sara: Well, if you don’t have credit card debt at all, you can sit this one out. There’s so many other things that everybody needs to worry about right now. You can take this one off your plate as something to be stressed about. Just focus on those really good habits you’ve built up of paying your credit card bills in full, on time every month.
And if you have a major purchase coming up that you don’t have the cash available to make, but you need to make that purchase, you can look into credit cards that offer no interest on new purchases for a year or more. That way, if you know you have to replace your refrigerator in a couple of months, you can plan ahead and avoid interest while you pay down that debt.
Sean: All right. That makes sense. Well, Holden, Kim, Sara, thank you all so much for joining us today.
Kim: Thanks for having us.
Sean: All right. If folks have questions about what the rate hike might mean for them, please hit us up on the Nerd hotline by calling 901-730-6373. That’s 901-730-N-E-R-D. Or email [email protected]
Now let’s get into this episode’s money question segment. This episode’s money question comes from a listener’s voicemail. Here it is.
Listener: Hey NerdWallet team, this is Jack. My question was whether or not it was a good idea to add my brothers and sisters as authorized users on my credit card. I myself have a fairly good credit score; it’s about 799. I have one older brother and then eight younger brothers and sisters. None of them have opened a line of credit yet. So I believe that would mean they don’t have a credit score. I just want to make sure that they are set up so when they’re trying to look for an apartment or get some kind of a loan down the line, that they have a credit score to build off of.
So my question is: If I can add brothers and sisters to my line of credit, if there are any drawbacks to doing so. And is there a limit to how many I can add? My older brother is 27, and then my younger brothers and sisters are ages 23 through 5 My parents have been very diligent while I was growing up to teach us to avoid debt and to be very wary of credit cards and to use cash whenever we can, just for some background info. Thank you all.
Liz Weston: To help us answer Jack’s question, on this episode of the podcast we’re joined by credit pro Bev O’Shea. Welcome back, Bev.
Bev O’Shea: Thank you, Liz. It’s a pleasure to be back.
Sean: It’s always so great to have you on, Bev. To start, can you please explain what an authorized user is?
Bev: An authorized user is somebody who is allowed to use your credit card, but is not responsible for paying it back.
Sean: Sounds like a pretty sweet deal for them.
Bev: It can be. My kids have been authorized users without it being a sweet deal.
Sean: I’m guessing because you put some rules in place.
Bev: When I added them as authorized users, I didn’t give them cards. So they didn’t really have any privileges, but they were able to use my credit history to help their scores.
Sean: And that’s one of the main benefits of setting up someone as an authorized user.
Liz: Let’s talk a little bit more about that benefit. Why does adding somebody as an authorized user help their credit?
Bev: Basically they’re able to use my credit profile as part of theirs. That is how, say, an 18-year-old can have a credit history of 26 years. And there’s some other advantages as well. They also inherit my payment record. They inherit my credit utilization or my credit limits. So all of that can help somebody who’s n
ew to credit have a much longer and perhaps much better credit track record than they would otherwise.
Liz: So your history with that particular card is essentially exported to their credit file?
Sean: And this also works as a way to teach someone how to use credit.
Bev: It does if that’s what you choose to do. And I personally think that is what you should choose to do if you’re going to lend your name and your history. Take it as an opportunity to teach them about credit so that they can do this without you one day.
Sean: Are there any drawbacks to setting someone up as an authorized user?
Bev: Oh, absolutely. Because authorized users can use your card and they don’t have to pay it back, it needs to be somebody that you really, really trust; because if they lend the card to somebody else and somebody else uses it, you’re responsible. It’s your bill. That is a big risk.
Sean: So that’s why you might want to set someone up who’s just learning the ropes of credit, but maybe not give them access to the card.
Bev: Maybe. Or there are a few credit cards where you can set an authorized user’s credit limit. You might be able to set a limit as low as maybe $200.
Sean: And is it possible as well to limit the types of transactions? Like if you set someone up as an authorized user on your credit card, they may not be able to purchase something like alcohol?
Bev: Not that I’m aware of. There is that with some debit cards that some parents use for allowance.
Liz: So what kind of a difference would it make in someone’s credit profile if they were added as an authorized user?
Bev: The less debt that they have in their credit profile, the bigger a difference it’s going to make. Somebody who has, say, had several cards and they’ve had some late payments and they’re looking for some points, may benefit a little bit from your credit history, but they will not benefit nearly as much as somebody who maybe has one or two credit cards and not much credit history; that person will benefit much more.
Liz: Or in this case, no credit history, it sounds like.
Sean: If you set someone up as an authorized user on an account that had late payments, could that actually drag down their credit?
Bev: It could, yeah. But it doesn’t with all credit bureaus, which is also a little bit strange. I know that Experian will automatically remove a delinquent account if the authorized user isn’t responsible for paying them.
Sean: So it only gives them the good information, not the bad.
Bev: That’s with Experian. I’m not sure about the other two.
Sean: I can see how this could get a little bit complicated.
Liz: Are there specific guidelines on who you can and can’t add as an authorized user? Can you add like a sibling, spouse, a friend, a roommate?
Bev: There’s sometimes limits on age. I’ve heard as young as 13; most of them are 18 though.
Liz: I remember that with my daughter. I first added her to a card, and it turned out that that particular card didn’t report anybody under 18. So I had to switch, added her to another card. And then when she turned 18, I added her to the first card, if you followed all that.
Sean: Well what about the number of people you can add? Our listener has many siblings who they are so generously hoping to help with this tool. Is there a number limit of people that you can add onto an account?
Bev: I don’t think there normally is a limit, and I would think within a family, he’s probably not going to run into a lot of problems. But I do want to talk a minute about some of the younger siblings. He’s not going to be able to get them credit cards, but there are things that can be done to protect their credit history, to keep them from becoming victims of identity theft.
Sean: What’s the age barrier that they won’t be able to become an AU, but they can still be protected through different tools?
Bev: There’s not. You can actually freeze the credit of a newborn, and credit freezing is what I would advise. Even for these children who are much, much too young to have credit cards or credit reports.
Liz: And that’s a bit of a pain to do, but it’s worth it.
Bev: You have to do it with all three credit bureaus; all three have slightly different procedures for doing it. NerdWallet has a story about how to do it one way for all three — basically filling out their documents and sending them exactly the same package of documents.
Sean: And we often recommend folks keep their credit profiles frozen in general when they’re not using them so that they can prevent incidents of fraud.
Liz: This case, Jack is not their parent though. And doesn’t it have to be a parent that does the freezing?
Bev: It does have to be a parent or guardian. Yes.
Liz: OK. So this is information he could present to the parents and say, “This is a good idea for you to do.”
Bev: Yeah. And the reason is because a child, particularly, can have his or her Social Security number stolen. And because we don’t tend to check children’s credit, it can go on for years before it’s discovered. So it’s a very good idea to freeze their credit. All they do is create a file that has nothing in it, but information, name and Social Security, and it’s frozen so that nobody else can use that number for fraud.
Sean: I have a question about building credit in general. If someone doesn’t have such a benevolent sibling to help them in this way, what are some tools that people can use to help establish their credit in general?
Bev: Assuming that they have an income, they can do something like get a credit-builder loan, which is basically turning a regular loan on its head. You pay it back first, and then you get the money. Or they could get a secured credit card. And in that case, you secure it, as it sounds like, with a deposit. And that deposit is typically, but not always, your credit limit. And some of them even let you graduate to just a regular credit card after a certain number of months of on-time payments. That can be a very good option.
Sean: What about products like Experian Boost? I’ve been seeing so many more advertisements for this lately. Do you think it’s a good tool for people?
Bev: Yes. Experian Boost can use some of your banking information to report some of the subscriptions that you have, utilities, things like Netflix, other things as regular payments, as trade lines, as they’re called in credit speak, and that can help your credit score. And Experian has an additional product called Experian Go that is offered to consumers who don’t seem to have a credit profile out there, and Go is basically just the file with nothing in it. But then once you have Go, you will be asked, “Do you want us to go and check this banking information to import into your file?” So you do have a credit file at that point.
Liz: And again, this is for just a single credit bureau. So if you are hoping to build your credit at all three bureaus, the traditional ways sound like that’s still the best, which is a credit-builder loan or a secured credit card. Those are sort of the basic baby steps towards building credit that work for all three bureaus.
Bev: Well, check to make sure that they report to all three bureaus. Sometimes some of them only report to one or two, and it’s really important that they report to all three.
Liz: Very good point. Yeah.
Sean: What would be the best way for someone to check that?
Bev: Just ask. It’s not always displayed prominently that they’re not reporting to all three.
Sean: Terms and conditions, that kind of thing.
Bev: And the other thing that you may want to do, Sean, is check the fees. Fees can vary a whole lot. And so do look at that and understand what you’re going to be paying for this credit help.
Sean: All right, Bev, do you have any final thoughts around authorized users or things you think people should keep in mind?
Bev: I do. Some of them have very different policies in their terms and conditions. Some will allow an authorized user to ask to be taken off an account and will do that. Others require that the primary user ask that the authorized user be taken off the account. Some allow authorized users to see the whole purchase history, every transaction. You may not want that for authorized users. So do check the terms and conditions, and read really carefully. It’s not alike for every card. Now, one last thing: If you’ve got premium cards, sometimes those can charge for additional cards for authorized users, so check.
Sean: Oh, interesting. All right.
Liz: And that gets expensive. Ask me how I know.
Sean: Oh boy. OK. Yeah. Well Bev, thank you so much for chatting with us. It’s always a joy.
Bev: Thank you, Sean. It’s been fun.
Sean: With that, let’s get on to our takeaway tips. I’ll start us off. First off, know the benefits of authorized users. Making someone an authorized user on your account can help them establish and learn how to use credit.
Liz: Next, beware of potential drawbacks. You’re on the hook for what an authorized user charges to an account. And as an authorized user, your credit profile may take a hit if the account holder mismanages their account.
Sean: Lastly, know other ways to build credit. Secured cards and credit-builder loans can help you establish a credit profile.
And that is all we have for this episode. Do you have a money question of your own? Turn to the Nerds, and call or text us your questions at 901-730-6373. That’s 901-730-NERD. And you can also email us at [email protected] Visit nerdwallet.com/podcast for more info on this episode, and remember to subscribe, rate and review us wherever you’re getting this podcast.
Liz: And here’s our brief disclaimer, thoughtfully crafted by NerdWallet’s legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances.
Sean: And with that said, until next time, turn to the Nerds.