No! The most popular credit card companies will always ask for income on a new application or request for a credit line increase. On occasion, they will verify an applicant’s income directly. More often, credit card companies will rely on information provided by a major credit reporting agency and will not verify an applicant’s income.
In February 2010, as the new provisions of the Credit Card Act of 2009 took effect, card issuers became responsible to check and verify that applicants actually had sufficient funds to repay monies they might borrow using a credit card.
New statistical tools, approved by the Federal Reserve, are being used by the major credit bureaus to determine if an applicant has the ability to pay back credit card loans. The bureaus use statistical models to estimate income.
This is accomplished using application information regarding a borrower’s employment and income, as well as data from local credit bureaus and IRS income tax database records.
Wasn’t income always a part of qualifying for a new credit card?
No. Prior to the Credit Card Act of 2009, credit card companies could issue cards at will, based on a consumer credit report and little else. College students, with little or no income to support payments, were specifically targeted by card issuers and often given credit cards as part of campus promotions.
The new laws have changed the way credit card issuers can market to college students and others under the age of 21. Now, no one under 21 can be issued a credit card unless they can qualify and prove they have sufficient income or provide a co-signer who can do the same.
The full text of the Credit Card Act can be found on the Senate website.
Have these new rules affected retailers and other providers of credit?
Yes, to some extent the laws contained in the Credit Card Act changed the way many retail merchants offer instant credit. Instead of having to take the time to ask each customer for income information at the point of sale, retailers may use the estimation models already approved by the Fed, and quickly available through a typical credit card terminal.
Retailers may pay more for these services, but they can keep their customers satisfied with their instant credit card account programs, unless of course, a customer’s application is instantly declined. While this may happen more often than before, these ability to pay laws were designed for the protection of consumers and merchants both.
What other steps are credit card issuers required to take?
There are several other steps that card issuers must take to help prevent their customers from taking on debt that they can’t afford. The most important thing they must consider is a debt-to-income ratio. These have always been used in qualifying borrowers of mortgage financing.
A debt-to-income ratio is a comparison of a borrower’s debt obligations to his income or assets. The remainder of a borrower’s income after paying his debt obligations may also be used. Of course the lower a borrower’s debt-to-income ratio, the better!
Federal regulators have indicated that card issuers may consider the following items when qualifying credit card applicants:
- Wages, salaries, bonuses, tips, or commissions
- Full time, part time, seasonal, or occasional jobs, military pay and self-employment earnings
- Unearned income, including interest, dividends, alimony, child support, public assistance and retirement benefits
- Asset accounts including, regular savings, money market, stocks, bonds, pension and retirement accounts
- Credit reports including credit scores
How do the income estimating models work?
Although estimation models aren’t fool proof, they generally come close to what a borrower has claimed on her application. Estimates are calculated at the same time bureaus compute a borrower’s credit score.
Lenders are not permitted to turn an applicant down based solely on these new estimation tools, but they will ask for additional information and substantiation if the estimation is not reasonable for the credit request that has been made.
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, proof of asset accounts, or other financial statements.
More information for consumers is available at MSN Money.
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