How your credit utilization ratio is calculated
When spouses share a card, their credit scores are both affected
Dear Credit Score Report,
My question is on the debt-to-credit ratio and how it affects the score. Say there is a married couple. The husband has two credit cards to the tune of $10,000 (the wife is an authorized user on both), and the wife has two credit cards to the tune of $10,000 (the husband is an authorized user on both). When the credit score is being calculated, do they calculate the debt-to-credit ratio based on $20,000 (the sum of both limits) or on individual limits? Thanks. -- James
Actually, it's a little more complicated than that. The calculation of your credit score combines a wide-angle view of your total combined credit utilization -- including any authorized credit card accounts -- with a close-up view of each individual credit card account.
FICO says it takes that approach in order to get the most accurate view possible of a person's credit utilization, or their existing debt levels compared to their available lines of credit. As you already know, FICO's scoring model -- by far the most widely used in the United States -- pays close attention to that ratio, and you're wise to do the same.
"The utilization rate is an important indicator of lending risk. A person who is charging to the limit on their credit cards is far more likely to suddenly have repayment problems than a person who uses their credit cards sparingly," says Rod Griffin, director of public education with credit bureau Experian. For credit scores, "the lower the utilization rate, the better," Griffin says.
In your example, James, if the husband and wife together have just those four credit card accounts (the two primary accounts and two authorized accounts), you accurately note that each spouse would have a total credit limit of $20,000. Any debt they carry on one credit card will be compared to that total limit, with the authorized accounts impacting both spouses' FICO scores. That gives you a good reason to piggyback with care. "You're inheriting both the good and bad from that account as the authorized user," FICO spokesman Craig Watts says.
However, that card's debt will also be compared to that card's credit limit. FICO explains that this combination of wide-angle shots and close-ups gives a more complete image of the cardholder's credit usage.
Here's an example: Let's say someone has two credit cards with a total limit of $10,000, as you describe above. (We'll assume that one card has a $6,000 limit and the other has a $4,000 limit.) If he maintained a zero balance on the higher-limit card but maxed out the other, his overall debt-to-credit ratio would be high -- at 40 percent -- but would also give a somewhat incomplete picture of his credit usage. By also incorporating a close-up look at each account, FICO can see that while the person may have maxed out one card, he still maintained a favorably low balance on the other. FICO's scoring algorithm would then make calculations using all the available information for a more accurate picture of that borrower's creditworthiness.
While you might assume that primary cardholder account balances are more important to a FICO score than authorized user balances, Watts cautions that isn't always the case. In fact, that weighting depends on what other information is listed on the borrower's credit history. "The way to protect your score is to keep your balances low, and not just on one, but on all of your accounts," Watts says.
In your example, James, the spouses would ideally have the benefit of regular communication, which could help you -- I mean, the husband -- address any bad credit habits before they impact the authorized user's credit score.
See related: Piggybacking gets clemency from FICO, FICO reveals how common credit mistakes affect scores, How fast does your credit score recover from your goofs?, Credit checks for job applicants become more common, Piggybacking, meant to jump-start credit, can backfire
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