Tammy listed her son as an authorized user on one of her credit cards to help him build his credit history. When they checked his credit scores, however, Tammy saw the balance she was carrying on the card seemed to be hurting, not helping, his numbers. “It is showing up on his credit report with a high debt ratio as he has no card of his own,” Tammy wrote me. “Will it hurt his credit score to remove him as an authorized user from this card? I don't want to cause any more damage.”
Credit scoring formulas are complicated, and it’s pretty easy to inadvertently shoot yourself in the foot. Here are four behaviors to avoid if you want to boost or preserve your scores:
A persistent myth is that you need to carry a balance to improve your scores. Not true. A big part of your credit score is determined by your “credit utilization,” or how much available credit you’re using.
A large balance on any revolving account, including a credit card, can hurt you. The fewer cards you have, the bigger the potential hurt. Spreading your debt over several cards is a temporary solution, but you should concentrate on getting those balances paid off.
Maxing Out Cards to Chase Rewards
People who pay their balances in full every month often mistakenly believe they don’t need to worry about maxing out their cards — but they do. The balances reported to the credit bureaus and used to compute your scores are typically the balances from your last statement, or from some random day of the month. It’s usually not the balance you owe as of the due date.
So, people who charge a lot (usually to reap credit card rewards) may want to consider spreading their charges over several cards, or making extra payments mid-cycle to reduce the balances that will be reported to the credit bureaus. The less of your credit limit you use, the better. Using 30 percent or less is good, 20 percent or less is better, while 10 percent or less is best.
Credit scoring formulas typically reward people with lots of (unused) available credit, but people still believe the myth that they can have “too many” open credit accounts. Bottom line: Closing accounts won’t improve your scores, and could hurt them, because you’re reducing your available credit.
Piggybacking the Wrong Card
When she was 16, Kayce’s stepmother added her as an authorized user on a credit card. The couple later divorced, and Kayce forgot about the account until she was turned down for a credit card after college. “I checked my credit report, and lo and behold, the account I am an authorized user on is now in serious straits,” Kayce wrote me. Her former stepmom ran the card up to its limit, then filed for bankruptcy, trashing Kayce’s credit in the process. The good news: many credit card issuers allow authorized users to request removal from accounts that are hurting, rather than helping, their credit.
For people like Tammy’s son with only one account, the downside of removing him as an authorized user may outweigh the upside, since it would leave him without any credit accounts and thus without credit scores. But people who have other, positive credit accounts on their reports should see a noticeable increase in their scores after a blighted account is removed.