A credit card is more of a necessity than luxury today. And to widen their reach, banks have introduced privilege offers of add-on cards and discounts that are not restricted to the holder, but extend to the spouse, parents or children. If you want to give a family member access to credit based on your credit credentials, an add-on credit card works well.
How it works
An add-on credit card is similar to the primary card without additional credit limit. All expenses incurred on an add-on card are billed to the primary cardholder. Banks allow primary holders access to three to five add-on cards. It is as good as your actual credit card and you receive a consolidated bill for the amount spent on both the cards. The limits on spending can be set for each add-on card.
Your bank assesses your overall spending limit and issues add-on cards accordingly. The credit limit on the primary card is divided between the primary and the add-on card/cards.
Impact on credit score
It is important to understand that increased credit limit usage or additional lines of credit could have an impact on your credit profile if not handled right. Your profile that is built up in a credit information company is a composite of your credit behaviour with all your banks over a period of time.
It is vital to note that the primary card holder is responsible for payments on charges incurred on both the primary and add-on credit cards issued. If the primary card holder defaults on any payments, this will be reflected as a default on the credit information reports of both the primary and add-on cardholders.
If a stretched credit usage results in over leverage and consequently a delay in repayment, this will have an impact on your credit profile and your credit score. In addition, even a demand for higher credit limits has a negative impact on your score. The prudent path would be to ensure that you make use of credit limits wisely and typically spend on your card what you can repay to your bank on the repayment due date.
Managing add-on credit
A few tips that can go a long way in keeping a check on purchases made on add-on cards include setting sub-limits on add-on cards, setting cash withdrawal limits and registering for SMS alerts on the usage of these add-on cards to monitor the amount being spent.
You may want to add on only those who can manage credit responsibly. If an increased credit limit usage on a credit card is unavoidable, it would be a good idea to take a credit report from any one of the credit information companies and ensure that you have visibility to all your credit lines and liabilities. This can then be used to determine what your overall liabilities are and what additionally can be repaid by you. Wise usage of credit will ensure the long-term health of your credit profile and score.
(The writer is Managing Director, Experian Credit Information Company and Country Manager, Experian India)