Sam is a busy New Yorker who’s savvy about his credit. A recent college graduate working his first job in the city, he got his first credit card last year, and he uses it wisely. He charges only $100 or $200 a month, enough to buy groceries and build up a credit history, but it’s a small enough balance that he can pay it off every month.
Just to make absolutely sure he doesn’t rack up any interest charges, Sam even goes online to his Bank of America account and pays off the balance immediately after making any big purchases.
“I got the card primarily to help build credit my credit history,” says Sam, 23.
To see if his strategy was working, Sam checked his credit report recently. What he found surprised him. In addition to his own credit card, another card appeared on his report. Sam’s father opened the account in 1996, when Sam was seven. When Sam went off to college, his father named him as an authorized user on the card. Sam used it only occasionally, to buy textbooks and medications, and always told his dad before he charged anything.
“The purpose was in case of an emergency,” Sam says.
So why does this card appear on Sam’s credit report when it has belonged to his dad the entire time? That’s actually standard practice in the credit industry, says Barry Paperno, Credit.com’s credit scoring expert.
And it happens that way to correct an old problem. Into the 1960s, Paperno explains, women usually couldn’t get their own credit cards. They may have had jobs and been responsible for most household purchases. But if they ever got divorced, they didn’t get credit for all those years of good credit decisions, since the credit history accrued only to the husband. This changed in 1974 with passage of the Equal Credit Opportunity Act, which among other things banned creditors from discriminating based on gender.
Since then, many spouses have entered into contracts exactly like the one Sam entered with his father when he went to college, in which the primary cardholder authorizes another person to use the card. As a result, both Sam and his father get credit for good decisions. They also get dinged for poor ones.
“It errs on the side of giving credit to authorized users who in reality are behaving as joint account holders,” Paperno says.
This arrangement is helping and hurting Sam simultaneously. On one hand, having the old card included on his report helps because one thing credit scoring bureaus consider is how long someone has had credit. The longer the credit history, the higher the score, all other things being equal.
“That is actually a plus, and is helping his score because he gets all of the history associated with that” card, says Barry Paperno, Credit.com’s credit scoring expert.
What isn’t helping Sam is that his dad’s card has a credit limit “in the five digits,” Sam says, and every month the balance is almost maxed out. Lenders call this a “high credit utilization rate,” and it hurts one’s credit rating because implies that a consumer may not be able to take on new debt if he is barely managing to pay the debt he already has.
Taken together, the card’s high balance is hurting Sam more than the long credit history is helping, Paperno says.
“There’s a mix of good and bad here, mostly bad,” says Paperno. “The high balance outweighs the other stuff.”
What are the options for Sam and his father? Whatever they do, Paperno says, they should put some distance between Sam and these high balances. There are a number of ways to do that. If Sam’s father has the money, he could pay off the debt. If not, he could transfer the debt to a different card he already has. Once the debt is transferred, Sam’s father could close the old card for good.
[Related Article: Can an Authorized Credit Card User Hurt Your Credit?]
This isn’t a bad plan, Paperno says, because despite persistent rumors to the contrary, closing old credit accounts does not count against your score. Instead, Sam’s father could transfer the balance to a brand new card that’s in his name only, especially if he can find one that offers a “teaser period” of six to 18 months, during which time he pays zero interest on the balance.
After that, why not keep the old card open, and simply not use it? That way Sam and his father both benefit from the card’s long history, but Sam no longer gets penalized for his dad’s high balance.
“A history that goes back to ’96 is not to be sneezed at,” Paperno says. “The best thing he can do is leave the card on Sam’s credit report, just minus the balance.”
Whatever he and his father decide to do, Sam is definitely on the right track. He’s being proactive about building up his credit score, and addressing head-on issues that might be hurting it. And while it might be uncomfortable to talk to one’s father about a persistent, five-figure credit card debt, doing so now could help five or years down the line, when Sam is ready to make a big purchase like buying a home.
“Is it possible” to have that talk, Sam says. “That definitely seems possible.”
[Credit Cards: Research and compare credit cards at Credit.com]
Image: joelogon, via Flickr