Generally, credit card companies do not verify employment, at least not directly. However, since early in 2009, credit card issuers have been required to qualify new card applicants and those seeking credit line increases, based on their ability to make their monthly credit card payments.
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In many cases, card companies will then guess at an applicant’s income using computer driven income estimation models created expressly for this purpose. Card companies will ask you to provide current income information and then use their estimators to determine if it’s accurate.
What happens if the credit card company guesses wrong?
A card issuer cannot turn you down solely because of the results of their income estimation. However, if their estimates differ significantly from what you’ve claimed on your application, they are within their rights to ask for further documentation before they will issue a new card or raise your credit limit.
At that point, the creditor may verify income by a number of means. This may include requests for recent pay stubs, current or prior year income tax returns, profit and loss statements or balance sheets from self employed individuals and proof of asset accounts.
Credit companies can also obtain information about you from a variety of other sources. They can check with IRS and verify the amounts you reported as income on your federal income tax returns.
Banks and other credit providers also have access to databases, which contain millions of employment records, which can provide salary information for many individuals.
Does our government agree that guessing is okay?
The Federal Reserve has said that lenders may use income estimation as long as it is statistically viable. So far, the models used by the major credit reporting agencies, Equifax, TransUnion, and Experian have all been approved by the Fed.
To be fair to both sides, lenders and consumers, this new ability to pay regulations were enacted to protect both banks and borrowers and are a sight better than earlier qualifying policies, which only considered a FICO, or Fair Isaac Corporation, credit score.
A borrower with a good credit score could load up on high balance cards without ever being asked how he was going to pay for them. These practices in part led many consumers into default and bankruptcy, prompting the banking crisis of 2007 and 2008.
What is the basis of these new qualifying guidelines?
In response to the highest credit card default rates in history, which topped 11% in 2008, the U.S. Congress passed the Credit CARD Act of 2009. This bill contained a number of new provisions mostly designed to protect consumers from unfair lending practices.
Provisions included changes in billing and notification procedures, and limited certain fees. The Credit CARD Act of 2009 also permitted borrowers to close existing accounts and pay them off under the original terms of their agreements, rather than accepting higher interest rates or other undesirable changes to their accounts.
What else must lenders take into consideration when qualifying new applicants?
Once a lender has a usable income figure, he must compute what is called a debt-to-income ratio. A ratio is a comparison of two numbers; in this case, the amount of your monthly income is compared to your total monthly payment obligations.
Monthly payments include, rent, or mortgage, loans and other revolving debts, including credit cards. If these payments represent more than 35% or 40% of your gross monthly income, you could be turned down for new credit.
What can I list on my credit card application?
Federal regulators have indicated that card issuers may consider the following items when qualifying credit card applicants:
- Salary, bonus, tip, and commission income
- Full or part-time employment
- Temporary or seasonal income
- Military reserve pay
- Dividend on stocks and interest income
- Child support and alimony
- Welfare, workfare, or other public assistance programs
- Social Security, disability, pension or other retirement benefits
Can I still get instant credit at a store?
Yes! Just be careful what you wish for. Instant credit card approval is used by retailers to motivate consumers to purchase big-ticket items they otherwise might not buy. Just like before, having too many credit obligations may lead to financial problems.
In addition, instant approval usually means conditional approval. You may walk out of the store with the goods, but you may not like the terms and conditions that come with the card, when you finally receive it several weeks later.
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