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Stay-at-home
parents who apply for a credit card to use for the
holidays might get a surprising rejection. That’s
thanks to a new federal regulation that might prohibit
them from getting approved for a card if they don’t
have an income of their own.
The
controversial new rule took effect Oct. 1, but consumers
are just now learning about it firsthand as we enter the
busiest time of the year for card applications: December
and January.
“There
is a seasonality to applying for credit cards, and I
think all of a sudden it’s going to hit people: ‘Oh
my goodness. I’m getting rejected. Why is that?’ ”
said Bill Hardekopf, chief executive of credit card
comparison site LowCards.com.
The rule
stems from the largely consumer-friendly CARD Act, which
took effect in 2010 and outlawed many of the nasty
practices credit card issuers used to wring more money
from cardholders. But among its consequences was a
clarification by the Federal Reserve this year that
credit card issuers must consider only the card
applicants’ own income, or their own ability to pay,
when granting approval for individual credit cards.
Household income or combined income can no longer be
considered. (Credit cards already issued are
unaffected.)
In
general, the “ability to pay” rule is a good idea,
consumer advocates say, so card users don’t pile up
debt they can’t pay off. But it also means a
stay-at-home spouse with little or no regular income
could be rejected when applying individually for a card,
whether a traditional credit card or a retail store
charge card.
It’s
difficult to measure how many card applicants since Oct.
1 have been rejected for that reason, as opposed to
those denied credit for other reasons, such as having a
low credit score, said Nessa Feddis, vice president and
senior counsel for the American Bankers Association. But
she said card issuers are concerned.
Feddis
said she knows of at least one issuer, which she would
not name, that is seeing an increase in rejections of
people who submitted an application reporting no income,
even if they have high credit scores.
“They
are definitely having to turn down people with good
credit scores,” she said.
If you
fall into the category of those who don’t have an
income but want a card, you have a few options.
—Apply
jointly. The most obvious solution for harmonious
married couples is to apply jointly for a card and
report the breadwinner’s income. But that might become
impractical when a nonearning spouse is out shopping
alone and tries to apply for instant credit — to get a
sales discount at a retailer, for example. And it might
irritate some stay-at-home spouses that they need their
husband or wife’s “permission” to apply for
credit.
Linda
Sherry, spokeswoman for consumer group Consumer Action,
said people should generally avoid instant credit
anyway, because any discount you get is often not worth
the short-term harm to your credit score and living with
another credit balance.
—Become
an authorized user. A nonearning spouse can also
piggyback on an income earner’s credit account as an
authorized user. That will build his or her credit
history, which is a good thing if the primary cardholder
pays on time.
(EDITORS:
BEGIN OPTIONAL TRIM)
—Live
in a community property state. If you’re married and
live in a community property state, such as California
or Texas, you can report the household income as your
income. Thus, the new regulation won’t affect those in
community property states.
“If an
applicant resides in a community property state, the
applicant’s income would generally include the income
of the applicant’s spouse,” the regulation says,
adding that card issuers could consider a spouse’s
income in that case. Other community property states
include Arizona, Idaho, Louisiana, Nevada, New Mexico,
Washington and Wisconsin, according to IRS Publication
555.
—Use
layaway. For consumers who have credit cards and use
them responsibly, paying layaway fees makes little
sense. But if you want a creditlike solution to pay for
holiday gifts, layaway is an option at many retailers.
Layaway allows consumers to set aside items at the store
while they are paid off in installments over a number of
weeks. Consumers take home the merchandise after they
pay in full. Stores offering layaway this year include
Wal-Mart, Sears and Toys R Us.
—Get an
income. Perhaps it’s obvious, but if nonworking
spouses can produce some income, perhaps from a
part-time job or work-from-home job, they might be able
to get a card in their own name.
(END
OPTIONAL TRIM)
—Report
half of household income. Concern about stay-at-home
spouses not being able to get a credit card might be
overblown, Sherry said. One work-around for couples who
file joint tax returns is for a nonearning spouse to
claim half the household income, she said. If you get
rejected, appeal to a card issuer’s customer service
manager and offer to allow access to an income tax
return, if necessary.
“I just
don’t think they should take no for an answer,” she
said. “If they file jointly, half that income is
theirs, legitimately.”
Feddis,
of the bankers association, said she’s not sure that
would work. It’s an example of how details of the new
regulation are still fuzzy as card issuers attempt to
comply with a regulation that potentially hurts their
business. After all, it’s in the banks’ interests to
issue more credit cards.
Moreover,
income isn’t as good a predictor of whether someone
will repay as their credit history is, Feddis said. As
of now, banks are being required to verify income,
although how they do that is a work in progress, Feddis
said.
“It’s
still sorting itself out,” she said. “It’s a
challenge right now.”
In the
context of buying holiday gifts, however, scrambling to
apply for credit cards isn’t a financially sound
solution. Saving and budgeting are far better, Sherry
said.
“People
shouldn’t wake up one day a few weeks from Christmas
and say, ‘Oh my gosh, I need a credit card,’ ” she
said.
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