On the surface, joint credit can seem like a fairly straightforward concept: Two or more people open up a line of credit, typically in the form of a credit card or loan, and share the responsibility of paying off the debt. Joint credit accounts are usually associated with married couples, domestic partners, or families, and are thought to be a convenient way to share and manage finances. Pretty simple, right?
Well, what about when businesses utilize joint credit accounts? Is there more than one form of joint credit, and if so, how do you decide which might be right for you? What are the potential liabilities or implications for your credit score? These are critical questions that shouldn’t be ignored before entering into a joint credit agreement.
In this article, we’ll provide a more thorough definition of joint credit, how it applies to businesses, and how joint credit accounts can be utilized in a way that protects cardholders from potential liabilities.
What is joint credit?
In the most simple terms, a joint credit account is a line of credit shared by two or more people. Most commonly, all cardholders or loan recipients will enjoy the same access to credit, but will also be equally responsible for paying off the balance.
When applying for joint credit, it’s important to remember that the issuer will make their decision based on the credit score of all applicants. This means that if one applicant’s credit score is significantly worse than the other’s, both may be denied for approval, or offered a less favorable interest rate on their credit line.
Additionally, applying for a joint credit card or loan will result in a hard credit inquiry for all applicants, resulting in an impact on their respective credit scores. Similarly, when defaults or missed payments occur, all cardholders will be considered responsible for the debt and incur a negative impact on their respective credit scores, regardless of who makes the bulk of the purchases or who the parties have agreed will pay the bills.
While joint credit accounts are often associated with married couples, it is not uncommon for two or more business owners to open up a joint account in order to make business-related purchases and collectively manage company expenses.
This can work as part of a broader expense management strategy, but its viability should be determined through significant financial planning and analysis.
Types of joint credit
Generally speaking, a joint credit account is an altogether distinct form of shared credit. However there are other types of shared accounts that, while similar in some ways, are subject to different sets of rules and obligations and should not be mistaken for a traditional joint credit agreement.
Let’s take a look at two other forms of shared credit and how they differ from a joint account:
Joint credit account vs. authorized user agreement
An authorized user agreement happens when a primary cardholder adds another person to their account. This person is then issued a credit card and is authorized to use the primary cardholder's credit line.
The difference between an authorized user agreement and a joint credit account lies mainly in the formal designation of responsibility; whereas joint account holders are held equally responsible by issuers for paying off debt, in an authorized user agreement that responsibility belongs only to the primary cardholder.
Importantly, authorized users are most commonly added by a cardholder with good credit in order to boost their credit score, but much like a joint account, if debt is not paid off in a timely fashion then both users’ credit scores will be impacted negatively.
Joint credit account vs. co-signed account
A co-signed account is an account that typically only authorizes one party to receive a loan or make credit card purchases, but has been issued on the strength of a third party’s good credit. With a co-signed account, the loan recipient or primary cardholder is responsible for paying off debt, and the co-signer only becomes responsible in the event of a default.
There are two main differences between a joint credit account and a co-signed account: authorization and responsibility. With a joint credit account, all involved parties are equally authorized to access funds or make purchases, whereas a co-signed account typically only has one authorized user.
Where responsibility is concerned, all authorized parties in a joint credit account are considered “co-borrowers,” and share equal responsibility for payment, whereas a co-signed account assigns responsibility to the primary cardholder or loan recipient unless they fail to pay.
Joint credit options for businesses
As mentioned, joint credit isn’t only issued to married couples or domestic partners and can be a viable tool for small business owners and startup founders looking to co-manage funds and make company-related purchases. When it comes to deciding on the most optimal way for a business to obtain a joint credit agreement, there are a few available options to consider:
Take out a loan as co-borrowers
When business partners are seeking a specific amount of capital to be allocated for a predetermined purpose, they might decide to apply for a one-off loan as co-borrowers. Joint loans have typically been issued through banks and other traditional financial institutions. However, it is becoming increasingly common for business owners to seek loans through online peer-to-peer (P2P) lending platforms.
While both options will have their pros and cons, it’s important to remember that regardless of how the approval processes may differ, interest rates will still depend on the credit history of all relevant borrowers.
Apply for a joint business credit card
For business owners and startup founders looking to establish a shared line of credit to co-manage a variety of business-related expenses, applying for a joint business credit card might be the best option.
Unfortunately, however, joint credit cards issued by traditional financial institutions are becoming increasingly hard to find, with Bank of America being one of the last major banking institutions known to offer joint credit. Alternatively, most institutions still make it relatively easy to add an authorized user to a credit card account, but this won’t always be a comfortable arrangement for the primary cardholder.
Seek a qualified co-signer for a loan or credit card
Finally, business owners who can’t secure an adequate line of credit based on their credit scores can look for a qualified third party to join as a co-signer, whether to apply for a loan or a business credit card.
While this may be a necessary step for small businesses in need of capital, it comes with the added difficulty of finding someone willing to take on the risk of securing your credit, as well as finding an institution willing to accept a co-signer as part of the agreement.
Is a joint credit account right for your business?
Having access to credit is often critical for small businesses and startups, but whether utilizing a joint account is right for your company will depend on a variety of factors. To determine whether a joint account might be the right option for you, consider the following:
Will a joint account be beneficial to your ability to get approved?
A strong credit score for business loans and credit cards is important. When determining whether to apply for joint credit, co-founders should have an honest discussion about their respective credit scores, as well as their confidence level as it relates to the company’s ability to pay their debts on time. In the case where there is a discrepancy between founders’ credit scores, a joint account may be necessary if an authorized user agreement is not favored by or acceptable to all relevant parties.
Does sharing responsibility to pay off debt have the potential to erode trust?
Unwavering trust is the foundation of any successful business relationship, so it’s important not to put yourself in situations that could unnecessarily compromise that foundation. No matter how much confidence co-founders have in one another, joint credit accounts invariably come with a certain degree of risk. Is that risk worth taking to advance the business?
How reliable and robust are your accounting processes?
Running a small business or startup is a complicated undertaking, particularly when it comes to expense management. While utilizing a joint credit account can be beneficial for the purposes of consolidating bills and improving a co-founder's credit score, you will first want to be sure that your business has a strong financial management strategy in place. Your accounting processes should be as robust and reliable as possible, optimizing transparency and making it easy to integrate joint account spending into the broader corporate budget.
3 ways to protect yourself from liability with a joint credit account
While using a joint credit account comes with inherent risks, there are steps that businesses can take to better protect themselves from liabilities. Here are three different actions you can take to minimize the risk associated with joint credit accounts:
Utilize spending controls
Thanks to advancements in accounting technology, businesses can now take advantage of corporate cards while resting assured that funds are only being spent on products and services that have been pre-approved.
For example, Ramp provides software solutions that not only enforce price point restrictions but also limit spending to certain categories and vendors. Spend controls ensure that all joint account users only make purchases based on pre-established budgets, so there will never be any gasp-inducing surprises.
Automate expense reporting and bill pay processes
Issues that arise with joint accounts often have nothing to do with nefarious intentions or an inability to pay off debt, but rather from expense reporting slip-ups that result in an unintentionally missed payment.
Platforms like Ramp give small businesses and startups an edge by offering automated expense reporting and AI-powered bill pay processes, boosting both the efficiency and accuracy with which organizations manage their books. If a joint credit account is right for your business, don’t take any unnecessary risks when it comes to late or missed payments.
Consider a fully integrated corporate card as an alternative
While small business owners and startup founders might find it attractive to utilize their joint credit accounts to execute high-level business transactions, advancements in technology continue to reveal the pitfalls of managing corporate expenses in disorganized silos.
This is why Ramp has created a single card that can be utilized across the organization by both leadership and employees and allows for the customization of everything from spending control, expense reporting, and bill pay, in addition to creating an intuitive, centralized location from which all critical accounting processes can be managed.
Ramp provides real-time insight into spending activity, and allows spending limits and category restrictions to be enforced for specific users or across the entire company. Our cards can be issued in physical form or virtually, and are powered by revolutionary software that scales along with your company's needs.
Interested in implementing better management processes around joint credit accounts, or finding an alternative business card to cut back on spending and maximize operational efficiency? Click here to get started with Ramp.