Issuers can take into account a variety of income sources in gauging your application, and a CFPB amendment also allows lenders to consider income that applicants age 21 and over have “reasonable expectation of access” to.
Is it against federal law for a card issuer to give someone a credit card who doesn’t have current income? That was reader Mike’s query.
The 2009 CARD Act requires that card issuers take into account a person’s so-called ability to repay before approving a credit card, or granting an increase in a card’s line of credit.
Peter Klipa, senior vice president of creditor relations at the National Foundation for Credit Counseling, notes that it’s unlikely that a card issuer would approve someone without any current income, considering that they would not have any “known ability to repay,” unless they could also point to some other income source.
See related: US report: CARD Act saved consumers $16 billion
Sources of income
In addition to current salary or wage income from employment, an applicant could also factor in “reasonably expected” income, or assets, including bonuses, tips and commission. The employment could be full-time or part-time, seasonal employment, irregular employment, military employment or self-employment.
Sources of income could also include:
- Interest income
- Dividend income
- Retirement benefits
- Public assistance
- Alimony payments
- Child support payments
- Proceeds from student loans that are left over after paying tuition and other expenses
The card issuer could also take into account an applicant’s assets in order to evaluate their ability to pay. Card issuers could consider ability to repay based on what part of a person’s income goes towards making debt payments, the ratio of debt payments to a person’s assets or the amount of income left over after making debt payments.
It’s not necessarily true that those with higher incomes have a higher ability to repay – what’s important is the amount of the income available to make the debt payments after meeting other expenses. Thus, someone who makes more money could also be spending more and having little left over to make debt payments, whereas someone with a lower income could be more frugal and have more money left over to meet debt obligations.
Reasonable expectation of access
Before 2013, the CARD Act required that card issuers take into account only the individual card applicant’s income or assets. However, the Consumer Financial Protection Bureau put in an amendment in 2013 that allowed card issuers to also consider any third-party income and assets that an individual card applicant of at least 21 years of age has a “reasonable expectation of access to.”
This particularly benefits those who have access to their working spouse or partner’s income, making it easier for stay-at-home spouses or partners, or those with erratic income, to qualify for a credit card without having to open a joint account, or resorting to a co-signor or guarantor.
For instance, if a spouse or partner regularly uses their salary to pay for a card applicant’s expenses the CFPB treats those payments as income with “reasonable expectation of access” for the applicant.
In the case of those who are under 21 and don’t have someone 21 or older as a joint applicant, co-signor or guarantor, the CFPB rules still call for them to be independently able to make their credit card payments.
The more expanded “reasonable expectation of access” approach does not apply to these underage applicants unless any law, such as a state community property law, grants the card applicant an ownership interest in the income or assets of a non-applicant.
However, if they do have an older joint applicant, or co-signor or guarantor, the card issuer can use the more liberal “reasonable expectation of access” approach to gauge the joint applicant, co-signor or guarantor’s ability to pay.
These rules also clarify that two roommates who share a household and can’t access each other’s income or assets cannot use each other’s income when a card issuer asks for “household income.”
Income verification and penalties
Credit card issuers don’t necessarily ask applicants to document their income, and usually you would just list your income when you apply for credit cards, which are typically unsecured loans.
Even then, it wouldn’t be in your best interests to falsify your income on a card application. Card issuers could verify your income even after issuing the card.
NFCC’s Klipa says, “It is a form of financial fraud to lie on a credit card application, and could be punishable by fines and jail time. Applications are also used in civil court proceedings as evidence. Creditors can obtain a civil judgment against individuals that allow for wage and bank garnishment in some states.”