Authorized User Credit Cards: Impact on Your Credit Utilization Ratio

Authorized user accounts can significantly influence your credit utilization ratio, a critical factor in determining your credit score. To understand how, let’s first break down what both authorized user accounts and credit utilization ratios are.

An authorized user account is essentially a piggyback arrangement on a credit card. The primary cardholder adds someone else as an authorized user to their credit card account. While the authorized user receives a card and can make purchases, they are not legally responsible for repaying the debt. That responsibility remains solely with the primary cardholder. However, the activity on the card, both positive and negative, is typically reported to credit bureaus for both the primary cardholder and the authorized user.

Credit utilization ratio is the percentage of your total available credit that you are currently using. It’s calculated by dividing your total credit card balances by your total credit limits, across all your credit cards. For example, if you have two credit cards with a combined credit limit of $10,000, and your total balance across both cards is $3,000, your credit utilization ratio is 30% ($3,000 / $10,000 = 0.30 or 30%).

Credit utilization is a major component of your credit score, generally accounting for around 30% of your FICO score. Lower credit utilization is generally better for your credit score. Credit bureaus and lenders view high credit utilization as a sign of higher risk, suggesting you might be overextended or struggling to manage your debt. Experts often recommend keeping your credit utilization below 30%, and ideally even lower, like below 10%, for optimal credit scoring.

Now, let’s connect these concepts. When you become an authorized user on a credit card, the credit card account information, including the credit limit and the balance, typically appears on your credit report as well as the primary cardholder’s. This means that the credit limit of the authorized user account is added to your total available credit, and the balance on that account is added to your total credit card debt, for the purpose of calculating your credit utilization ratio.

Here’s how authorized user accounts can impact your credit utilization ratio, both positively and negatively:

Positive Impact:

• Lowering Overall Utilization: If the primary cardholder has a low balance relative to the credit limit on the card you are authorized on, it can significantly lower your overall credit utilization ratio. Imagine you have a credit card with a $1,000 limit and a $500 balance (50% utilization). If you become an authorized user on a card with a $10,000 limit and a $1,000 balance (10% utilization), your combined available credit becomes $11,000 and your combined balance becomes $1,500. Your new credit utilization ratio would be approximately 13.6% ($1,500 / $11,000), a substantial improvement. This can boost your credit score, especially if you were previously struggling with higher utilization.
• Establishing Credit History: For individuals with limited credit history, becoming an authorized user can be a way to establish a credit file and potentially improve their credit score. The history of the primary cardholder’s account, if it’s a long-standing account with positive payment history, can be factored into your credit report, helping you build a positive credit track record.

Negative Impact:

• Raising Overall Utilization: Conversely, if the primary cardholder carries a high balance on the authorized user account, it can negatively impact your credit utilization ratio. Using the same example, if the $10,000 limit card had a $8,000 balance (80% utilization), your combined utilization would become approximately 86.4% ($8,500 / $11,000), which is very high and would likely hurt your credit score.
• Increased Perceived Risk: Even if the primary cardholder manages the account responsibly, adding too many authorized user accounts with significant credit limits could artificially inflate your total available credit. While this might initially lower your utilization ratio, some lenders might see this as a sign of potential risk if they perceive you as having access to a large amount of credit that isn’t truly yours to manage directly.

Important Considerations:

• Primary User’s Behavior: The impact of an authorized user account on your credit utilization ratio is entirely dependent on the primary cardholder’s spending and payment habits. If they are responsible and keep utilization low and payments on time, it can be beneficial. However, their financial missteps will also be reflected on your credit report.
• Account Removal: You can request to be removed as an authorized user if you are concerned about the account negatively impacting your credit. Contact the credit card issuer to be removed from the account. This will typically remove the account information from your credit report after processing.
• Not a Long-Term Solution: While being an authorized user can be a temporary strategy to improve or build credit, it’s not a substitute for building your own credit responsibly by managing your own credit accounts. Lenders prefer to see that you can manage credit responsibly in your own name.

In conclusion, authorized user accounts can be a double-edged sword when it comes to credit utilization ratios. They can be beneficial if the primary cardholder uses credit responsibly and maintains low balances, helping to lower your utilization and potentially improve your credit score. However, they can also be detrimental if the primary cardholder has high balances or poor payment habits, potentially raising your utilization and harming your credit. It’s crucial to carefully consider the primary cardholder’s financial habits and the potential impact before becoming or remaining an authorized user.