What’s the point of the credit card application process? Obviously, it’s in place so creditors can evaluate prospective customers and make sure people will be financially capable of living up to the terms of their credit agreements. That makes sense. But what’s the point of a credit card application process that provides credit card companies with misleading information and prevents them from making truly educated decisions about whom to give credit?
There really is none, and that’s why the current system is broken. Credit card companies evaluate each individual applicant’s liability and debt but require that these same individuals report their household income, not the money they earn personally. The information creditors have at hand thus provides them with a misleading sense of which consumers can afford credit and which will be overburdened by it. As a result, many consumers and banks become overleveraged, placing a strain upon the entire economy.
The desire to fix an inherently flawed process is what has driven the Fed to propose new rules that would require credit card companies to use individual income in their decision making processes. Strong opposition has emerged in response to this proposal, however, primarily from women’s organisations which argue that the rules will prevent stay-at-home parents from establishing credit in their own names.
Individual credit history is extremely important because credit standing is one of the primary criteria that lenders, real estate agents, landlords, car dealers and sometimes even employers consider when evaluating applicants. Therefore, should individual income become a prerequisite for obtaining credit, opponents argue, stay-at-home parents would be unable to open their own credit cards and establish their own credit. This would make it difficult to impossible for them to get a loan, buy or rent a house, get a car or land a job should something happen to their significant other.
Such a concern is surely warranted, but it should not lead to even the slightest delay in the implementation of the Fed’s proposed rules. Why? Because these rules represent positive change, and measures can be taken to alleviate whatever concerns people have about them. One simple method of assuaging these fears would be to require that credit card companies offer the option for joint credit card applications. These applications would be evaluated based on both parties’ incomes, debts, assets, etc. Usage information would then be sent to both parties’ credit reports.
Non-earning married individuals will not be left out in the cold until these joint accounts become a reality either. Secured credit cards provide basically guaranteed approval, regardless of income, and information about their use is reported to the major credit bureaus. In order to get such a card, all you must do is place a refundable security deposit (the higher the better) and provide a valid Social Security Number.
Ultimately, while opponents of the Fed’s proposed rules have a point in their critiques, we must look for ways to rectify whatever problems exist instead of shooting down the proposal altogether. Simply opposing the rules off-hand is a short-sighted approach. The rules will be unquestionably economically beneficial; they simply need slight supplementation in order to be practically beneficial for everyone.
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