By Odysseas Papadimitriou, CEO of the credit card website CardHub.com
The economy, as well as our regulation and perception of it, are in a state of flux these days. So, it’s no surprise many consumers are still in the dark when it comes to new rules dictating the credit card market in the aftermath of the Great Recession. From the notion that people under the age of 21 can’t get credit cards to the idea that household income can no longer be listed on credit card applications, there are a number of common misconceptions that still remain.
Young people can indeed open student credit cards; they just need the income or assets necessary to make monthly minimum payments – same as anyone else. Household income can also be used on credit card applications, though not necessarily by that name.
That last point is especially important in this age of social change and building momentum for both gender and marriage equality. You see, the CARD Act initially outlawed the use of shared income on credit card applications – a proposal that proved to have far-reaching social implications.
The Mistaken Abolition of Household Income?
The rationale was that shared, or household, income obscured underwriting efforts since debts were listed on the individual level. In other words, it was impossible to accurately determine an applicant’s true ability to pay, as a significant portion of the household income listed on an application could already be earmarked for debts held by applicant’s partner. And if much of the listed income is not truly available, the credit line for which the applicant is approved may end up being way out of whack with the applicant’s true ability to pay. From there, it’s easy to imagine a situation where the proud new cardholder racks up unsustainable debts and then defaults, thereby ruining his or her credit and costing the card issuer money in the process.
Accordingly, as the entire credit card market tightened underwriting standards and renewed its focus on the safety and soundness of the banking system, abolishing the household income system only seemed logical. “Credit card applications generally cannot request a consumer’s ‘household income’ because that term is too vague to allow issuers to properly evaluate the consumer’s ability to pay,” the CFPB wrote in its initially proposed rule. “Instead, issuers must consider the consumer’s individual income or salary.”
The Resulting Backlash
However, in issuing this proposal, the CFPB apparently failed to consider a few important issues. What would the rule mean for stay-at-home parents who may not have individual income? Would they be restricted from obtaining credit and maximizing their credit scores? How would such an environment affect the economic balance of relationships? And what would this mean for men and women in potentially abusive relationships?
Such questions sparked fierce opposition, particularly from women’s groups like MomsRising, which amassed tens of thousands of signatures on petitions calling for the repeal of the proposed rule. Notable politicians like Reps. Carolyn Maloney (D-NY) and Louise Slaughter (D-NY) – two of the CARD Act’s authors – also spoke out against the rule.
“We are concerned that the Board’s proposal will hamper a stay-at-home mom’s ability to establish her own independent credit history by applying independently for a card,” Maloney and Slaughter wrote in a joint letter to the Federal Reserve. “Many stay-at-home moms have a strong work history, yet the proposed regulations ignore their demonstrated credit-worthiness because of their lack of current market income.”
A Final Resolution
The Consumer Financial Protection Bureau ultimately heard the calls of stay-at-home spouses across the country, repealing its individual income plan in favor of a final rule that “allows card issuers to consider third-party income if the applicant has a reasonable expectation of access to it,” according to a press release. This decision represents a significant victory for women’s rights, according to Elaine McCrate, professor of economics and women’s studies at the University of Vermont. “It’s a recognition that marriage is an economic partnership, in which women contribute seriously undervalued nonmarket services, and should in turn have access to the fruits of their partner’s earnings and credit.” But for this throwback underwriting environment to work, stay-at-home spouses must be careful to leverage their access to credit with care.
How to Navigate the New Landscape
Just because you’re able to open a new credit card doesn’t mean you should, just like opening a new credit card doesn’t mean you actually have to use it. Those are two very important principles to keep in mind to avoid finding ourselves deep in debt.
With that in mind, here are a few tips for safely tapping credit and building your credit score in this new-age credit landscape:
- Open a Secured Card: If credit building is your primary objective, opening a secured credit card is by far your safest option. It’s impossible to spend beyond your means with a secured card, since your credit line will be equal to the refundable security deposit you place upon account opening. That security deposit also minimizes issuer risk, which means account approval is pretty much guaranteed.
- Fill Out a Joint Application: A number of credit card issuers offer joint applications, which allow a couple to list both of their Social Security Numbers as well as both parties’ income and debt obligations. Doing so will afford credit card underwriters a clear sense of your financial situation and will result in you getting approval for a much more affordable credit line, if either you or your partner has shown a tendency to overspend.
- Cut Up Your Card: You don’t need to make purchases or maintain a balance with a credit card in order to build credit. Account information will be reported to the major credit bureaus on a monthly basis even if your physical card is locked in a drawer or cut into a million pieces. Accordingly, if you want to take advantage of the credit building capabilities that credit cards provide but you don’t trust yourself to spend within your means, just remove the temptation altogether.
Ultimately, it’s important to recognize that the ability to access credit is a privilege that must be exercised with care. Judging from the more than $73 billion in credit card debt we’ve racked up in the past two years alone, far too few people are doing so.