In one perhaps unintended consequence of the Credit CARD Act, it will become more difficult for non-working spouses, often women, to get credit cards on their own. The Federal Reserve Board has announced its final rule implementing the CARD Act, effective October 1, 2011, which includes guidance on the thorny issue of evaluating a credit applicant’s ability to pay.
When writing the CARD Act, Congress attempted to rein in the often outrageous credit limits issuers were handing out to consumers, with what seemed like little regard as to whether or not customers taking full advantage of their limits would realistically be able to pay them off. A provision in the Act says that:
[a] card issuer may not open any credit card account for any consumer under an open end consumer credit plan, or increase any credit limit applicable to such account, unless the card issuer considers the ability of the consumer to make the required payments under the terms of such account.
While it sounds straightforward enough, issuers worried the provision could thwart their ability to provide instant credit in retail stores. How could they verify that someone has the ability to pay back the debt in the mere seconds it takes to open a new retail store account?
[Related article: Is the Fed’s New Credit Card Rule Sexist?]
In response, the board, which has been charged with writing rules to implement the Credit CARD Act, determined that creditors could rely on information provided by a consumer on a credit card application without verifying that information for themselves. In other words, you don’t have to fork over your paystubs to prove you earn what you say you do. Issuers can take you at your word as long as it makes sense.
Card issuers then came up with another question: Could household income—rather than individual income—be used to qualify applicants? It’s a legitimate question, especially in households where one spouse works outside the home and the other works at home, oftentimes to raise a family. The spouse who doesn’t have an external job may not get a formal paycheck, but still have equal access to household money to pay bills—including the new credit card account.
On this issue, creditors appeared to have the Equal Credit Opportunity Act on their side. ECOA, a law passed in 1974, was designed to help prevent discrimination by lenders, especially when it came to extending credit to women. Under ECOA, for example, creditors can’t ask about a credit applicant’s marital status.
After reviewing comments from the industry and consumer groups, the Fed determined that household income would not fulfil the requirements of the CARD Act in determining whether an applicant has the ability to repay the debt. The exception is in states like California or Texas, where property acquired during the marriage is generally considered community property. If issuers do ask for household income, they will have to go to the additional step of verifying that the individual applying has the ability to repay the debt. There is no similar requirement if the issuer asks for the applicant’s individual income.
This means we probably won’t be seeing household income on credit applications much longer. It also means that those who have unpaid, full-time jobs within their households—often but not always women—will likely be dependent upon their spouses to establish credit.
In its commentary, the Board says that non-working spouses can still establish credit by being added to their spouse’s accounts as an authorised user or joint account holder. But that still leaves their credit life completely tied to that of their spouse, something I don’t recommend.
The other alternative? Stretch the truth. State an income you earn in your household job. Make up a job title. But that’s something I also don’t recommend. Not only will it get tricky when it comes to listing the details of your employment, but it could really come back to haunt you if you ever had problems paying back the account. But I suppose that’s what the Board is trying to help you avoid in the first place.