One of the new rules that has arisen as a part of the recently enacted CARD legislation that hasn’t gotten a whole lot of press is the new income and “ability to pay” requirements that stores are supposed to adhere too before they issue a retail credit card. In the past retail credit card issuers issued cards based almost solely on an individual’s credit score without even considering the applicant’s income, assets, and ability to pay.
Retail Credit Card Default Rates
Retail credit cards have long had higher default rates than regular credit cards (12.6% of retail credit cards were charged off in 12/09 vs. 10.7% of prime credit cards in 12/09 according to Fitch Ratings) and one of the reasons why this is the case is that comparatively speaking it is fairly easy to get approved for a retail credit card while regular credit cards can sometimes be difficult to get approved for unless one has a decent credit history and a verifiable and stable source of income (with the exception of secured credit cards, student credit cards, and credit cards designed specifically for those with bad credit).
What About Sensitive Income Data?
The biggest concern by many retailers after the CARD act was passed was that since they had to double down on only offering credit cards to those with a certain amount of income, assets, etc. that they could check then how exactly could they accomplish this without forcing retail clerks to ask sensitive questions about an applicant’s income, assets, and ability to pay?
After all, would you like to plop down your tax returns onto the counter at Wal-Mart so that the clerk could have a discussion with you about applying for a Wal-Mart credit card? Probably not.
The solution enacted by many different retailers is to use sophisticated software programs that require as little income data inputs as possible and then it uses statistical analysis and data modeling to determine where the applicant stands in relation to their ability to pay and a general view of their income and assets. However, there is no income verification requirements currently in place (more on this below).
Pros and Cons
The pros and cons of this particular part of the CARD legislation boils down to really two different ways to handle access to a consumer’s access to credit. Those who are in favor of the new retail credit card rules believe that since store credit card default rates have historically been higher than regular credit cards then it is the responsibility of the government to force retailers to not make it as easy for consumers to get a store credit card since easy access to credit has caused a lot of trouble in recent years in many other areas.
Those who are opposed to the new store credit card rules believe that retailers should be able to do whatever they want as it is the consumer’s responsibility to apply for and use credit responsibly and that restricting consumer credit cards will do more harm than it will good because it will discourage retail spending and further slow any hopes of a recovery from the current economic recession.
My personal opinion is to let the retailers issue credit cards to whoever they would like to issue credit cards to. Default rates are the one thing that will naturally serve to regulate the issuing of retail credit cards and all other types of credit cards for that matter as card issuers will be forced to accurately price the risk of disqualify the risk in order to make a profit. The responsibility for deciding if one should apply for a credit card lies at the feet of the consumer. If I apply for a store credit card and I wrack up a huge balance then it is my fault and my fault alone and NOT the store’s fault for issuing me the credit card or the government’s fault for not stepping in and imposing income restrictions.
A side issue that I also have with these new restrictions is that it puts the Federal Government in the place of being the ultimate decider of how to underwrite credit cards. What about all of the people who have excellent credit scores and who manage their credit responsibly and who would have qualified for a retail credit card in the past but now under the new laws they are unable to get a store credit card because their income is too low? Why is the government trying to make the decision for the retailer and force them to not issue a card to this responsible credit card user with an excellent credit score but who doesn’t have a high income?
I can certainly understand the temptation to overreach because the fallout from the sub prime mortgage fiasco is no doubt fresh on the mind of many legislators and because overreaching is just what the government is good at but in all practicality it could be argued that the single biggest cause of the sub prime mortgage mess was a lack of honesty (i.e. the home loan applicant fudging their income numbers, the mortgage broker looking the other way, the loan underwriters not bothering to verify that the income numbers were real or offering “stated income” or “no doc” loans that all but encouraged applicants to lie about their income) so if these new retail credit card company rules don’t require any type of income verification process then what is the point?
Where do YOU Stand?
Do you find yourself agreeing with those in the “It’s the Government’s/Retailers Responsibility” camp or with those in the “It’s the Consumers Responsibility” camp?
Do you think that there is a kind of parallel between the sub prime mortgage mess and its underwriting and the underwriting of retail credit cards?
Will the new income and assets checking process discourage you from applying for a retail credit card?
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