Credit Scoring Rules Different on Charge Cards

By authorized-user-charge-cardLifestyle and

Dear To Her Credit,

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I'm trying to talk my brother into adding me to his American Express Gold card. If he adds me to his credit card as an authorized user, does my activity show on his credit report? For example, if I spend a certain amount does it change his debt-utilization ratio, even though I pay off the balance every month? Also, what if he doesn't activate his card? Does that mean I won't be able to activate my card unless he activates his?

- Ashley

Dear Ashley,

There's only one credit card account, even when an authorized user is added. The credit card company doesn't keep track of who spent what, or who made a payment. All the charges are on one statement. If you buy things on your brother's account as an authorized user, your activity will definitely show up -- on both his statements and his credit report.

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The AmEx Gold card is a charge card that requires all charges to be paid in full each month, not a credit card that allows you to carry a balance. When the account is looked at for credit scoring purposes, charge cards are excluded from credit utilization calculations. So you don't need to worry about the utilization -- since no balances are allowed, no credit is ever utilized and the ratio doesn't exist. Just worry about paying it off monthly, without fail. Should the two of you fail to pay off a charge card bill in full, that may generate a late payment report to the credit bureaus, which will negatively affect your credit reports.

If it were a regular credit card, even if you pay it off every month, your charges would affect your brother's credit utilization ratio. You never know when the bank will report to the credit bureau. It could be the day before you make a payment, when the account has its highest balance.

To keep a credit utilization ratio at its optimal level, it's best to keep the balance low throughout the month when the cardholder especially wants a good credit score. If it's been paid off faithfully every month, simply stop using the card, or make more than one payment during the month. That way, the balance is low when the credit card company reports to the bureaus.

You also asked about activation. Banks have different card activation policies with some more liberal than others about how cards get switched on.

I think a bigger question still remains -- should your brother add you to his American Express Gold card? If your brother were asking me, I would say no. If he wants to help you, there are other ways he can do that. Entangling family finances is one of the quickest ways I know to mess up both family and finances. If you can't get your own credit card, there's a reason, even if it's just lack of income and credit history. If he adds you to his card, you'll be practicing your credit skills on his credit. It's like asking to borrow his new car to take your first driving lessons. It may be too much to ask.

From your perspective, having him add you to his card has some advantages. Besides having a card to use, you can start to build up a credit history of your own. You're doing what's called "piggybacking" -- being added as an authorized user so the good credit history of the card shows up on your credit report. That can help you qualify for your own credit, and be on your own.

In the meantime, however, you have a new card to watch over. If you've never had a credit card before, you can't imagine how quickly those charges add up the first month you own it. If you're like many people, you'll scan the statement over and over, wondering how all those little tiny charges could add up to such a big total. It's bad enough when it happens on your first card, and you're the only person it affects. But if you're using your brother's card, and you've promised to pay it off every month, it will be twice as stressful.

Despite the advantages of getting credit quickly by using your brother's card, I recommend that you either get your own card or do without for now. You've gotten by this long without one.

You may be able to get a debit card or a prepaid card if you don't qualify for a credit card yet. Pay your bills faithfully, and soon you'll qualify for your own credit -- even a gold card of your own, if that's what you want.

See related: Think you can't use a not-yet-activated card? Think again, Rules differ on shared accounts