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I wrote last week about how I finally took my own advice and added a 2 percent cash back card to my wallet. That new card sign-up also satisfied another financial objective for my family: obtaining credit in my wife Chelsea’s name.
Since leaving her job and becoming a stay-at-home mom eight years ago, Chelsea’s credit score has declined due to a lack of credit usage. Her main source of credit in recent years has been as an authorized user on two credit card accounts.
How being an authorized user affects your credit
Most people don’t realize that only a small number of credit card accounts are classified as jointly held accounts. Typically, there’s a primary account holder, and additional cardholders are classified as authorized users.
In practice, an authorized user relationship means that both members of the couple can use the card and combine purchases and rewards. It feels like you’re managing your spending together, but there are some important legal distinctions. The primary account holder, for instance, is the one who’s legally responsible for paying the card company back.
If you’re an authorized user, you can’t keep the account if the primary borrower dies or if you get divorced. And while this account appears on your credit reports, it doesn’t carry the same weight as an account in your own name.
That was a major talking point a few years ago, when some prominent technology industry executives accused Apple Card of sexism because their wives were offered much lower credit limits. The New York State Department of Financial Services absolved Apple and its partner Goldman Sachs of any wrongdoing. One of the regulator’s explanations was that the spouses’ credit scores were not as strong because they relied too heavily on authorized user accounts.
“Although authorized user status can offer convenience, consumers should be aware of potential pitfalls,” one section of the report reads. “Admittedly, consumers can commence building credit history through authorized user status. At the same time, lenders may give less weight to authorized user status in evaluating creditworthiness. In other words, relying on access to credit as an authorized user rather than establishing independent accounts may lead to a weaker credit history.”
That has definitely happened to Chelsea. When she applied for the Wells Fargo Active Cash® Card last month, her credit score was 66 points lower than mine. She doesn’t have any blemishes on her credit reports — she just doesn’t have nearly as much positive information.
The risks of letting your credit lapse
My credit reports are much more comprehensive, since the last two cars we bought (one with a loan and the other with a lease) are both solely in my name. I also serve as the primary account holder on two credit card accounts that we both use, whereas she didn’t have any primary accounts prior to the recent application.
While positive information from closed accounts stays on your credit reports for up to 10 years, its influence fades over time. Chelsea has seven closed credit cards, three closed auto loans/leases and two closed mortgages on her credit reports. In hindsight, we probably should have kept at least one of her old credit cards active. And we probably should have jointly applied for at least one of the car loans or leases.
Besides couples, these lessons also apply to older people. Senior citizens are surprisingly likely to have thin or nonexistent credit files because they may have paid off debt such as mortgages and car loans. Most people think of young adults and immigrants when they think of credit invisibles, and while those are common examples, they’re hardly the only ones.
The bottom line
Responsible credit card usage is one of the best ways to build and maintain a strong credit score. You wouldn’t open a mortgage or car loan just to build credit, of course, but a credit card can be fee-free assuming you pay in full every month. And credit cards are useful ways to make daily purchases and earn rewards. I’m glad that we opened this new card in Chelsea’s name to enhance our rewards strategy and improve her credit score.
Have a question about credit cards? E-mail me at email@example.com and I’d be happy to help.