We all know the importance of a good credit score. Its benefits range from getting the best loan and credit card terms to being able to rent a home without a security deposit, lease a car and get hired for certain financial or government jobs. However, many of us aren’t so sure how the Federal Reserve’s new rules concerning household income affects stay-at-home spouses’ access to credit cards and thereby their ability to build credit under their own names as well. So what say we take a closer look at the matter?
The rule
In a move altering a long-held credit card underwriting practice, the Fed a year ago announced a final rule mandating that individual (and not household) income is to be used for the purpose of evaluating a credit card applicant’s worthiness. According to a press release issued by the nation’s central bank, “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. Instead, issuers must consider the consumer’s individual income or salary.” This rule change, one of a series made to clarify the implementation of the 2009 Credit CARD Act, took effect on October 1.
The reasoning
The Fed proposed and ultimately adopted this rule in order to create a more logical system of credit card underwriting, where one’s access to credit is a function of only his own ability to pay back what he owes, and thereby ultimately lower the incidence of overleveraging. Credit card overleveraging ran rampant in the run-up to the Great Recession, primarily because an imbalanced system was in place. While income was being considered on the household level, debt obligations were considered individually, which meant that one’s living situation had the potential to mask a lack of disposable income.
For example, a consumer with no income of his own but $150,000 in annual household income and $15,000 in outstanding student loans might on the surface appear to be a good candidate for a credit card with a $10,000 credit line. But what if that consumer’s wife also had $1 million in debt? The couple would have no disposable income and would therefore be extremely unqualified for the aforementioned credit card, though the card’s issuer would have no way of knowing. The bottom line therefore is that you simply cannot evaluate a credit card applicant without knowing exactly how much available cash he or she has. The Fed’s individual income requirement allows this by forcing an apples-to-apples comparison of assets and liabilities.
Your move
But does this new rule also cut certain demographics, namely stay-at-home spouses, off from credit? That is the question that most people are asking, and the answer is no. In fact, such people have two options when it comes to getting a credit card.
Option 1: Some credit card companies offer joint applications, allowing couples to use household income as well as household debts and liabilities in applying for a shared credit card account, for which both parties will be held legally responsible. Finding such an issuer therefore represents a good way for stay-at-home parents to both maintain their spending power and keep positive information flowing into their major credit reports each month.
Option 2: While someone who doesn’t have steady income for one reason or another might not be able to independently qualify for an unsecured credit card any longer, anyone with at least $200 in cash and a valid Social Security Number can indeed still gain access to credit by opening a secured credit card. Secured credit cards offer what amounts to guaranteed approval because they require a cash deposit (hence the $200) that serves the dual purpose of acting as your credit line and ensuring that issuers don’t have to worry about whether or not consumers will pay off their balances. Secured cards also report to the major credit bureaus on a monthly basis and are, in fact, indistinguishable from unsecured cards on your credit reports.
While neither of these options might be perfect for some people, it should give everyone peace of mind knowing that banks are now making smarter decisions across the board and that stay at-home-parents still have means of building and maintaining credit should complications arise in terms of either their marriage or the health of their significant other.
The author of this guest article is Odysseas Papadimitriou, CEO of Card Hub, a website that assists consumers in finding the best credit card deals.