A change in the way credit card companies operate that was intended to keep young people from running up debt has had the unintended consequence of making it harder for stay-at-home spouses to get plastic in their own names.
One of the fine points included in the Credit Card Act of 2009 was an ability-to-pay provision that requires credit card issuers to evaluate whether applicants will be able to make monthly minimum payments in light of their independent income and debt obligations. This specifically impacts 16 million stay-at-home spouses who do not have any personal income to report.
“This provision in the Card Act was originally intended to stop college kids and young adults from using their parent’s income to get a credit card and charge lots of debt in their own name,” said Bill Hardekopf, CEO of Lowcards.com in Birmingham, Ala.
“The provision says you have to show your own income to get a card. It was done because college kids were ringing up way too much debt.”
What lawmakers did not realize is that the rule requiring independent income penalized stay-at-home spouses, and it wasn’t long before there was an outcry from that population.
Now the Consumer Financial Protection Bureau has proposed new legislation to reverse that part of the Card Act and allow the stay-at-home spouse or partner to rely on shared income when applying for a credit card account, rather than individual income.
“When stay-at-home spouses or partners have the ability to make payments on a credit card, they should be able to obtain a card in their own name,” said Richard Cordray, director of the Washington, D.C.-based CFPB. “The CFPB is proposing common-sense changes that would facilitate credit access for spouses or partners who do not work outside the home.”
Ken Lin, CEO of Credit Karma in San Francisco, Calif., said in an age where about half of all marriages end in divorce, it is important for both spouses to have access to credit.
“Even if things are great today, if a couple gets divorced, one of them could very easily be in a situation with no credit and they can't even rent an apartment, because in most cases landlords do credit checks,” Lin said. “You should be building credit because it puts you in a very precarious spot if something bad happens in the relationship.”
Not all credit industry experts see things that way.
Odysseas Papadimitrious, CEO of Card Hub, a Washington, D.C.-based credit card comparison website, said the CFPB proposal is a recipe for disaster that will only hurt the consumers and the credit industry in the long run.
“When you allow a credit card applicant to list income that may or may not be their own, it is impossible for underwriters to determine how much of it is already spoken for and how much is actually available for new credit card payments,” said Papadimitrious, who previously served as a senior director in Capital One’s credit card division.
“The fog of shared income makes it harder for underwriters to see which applicants are truly qualified, thereby preventing some deserving consumers from garnering approval and allowing those who cannot afford their new financial obligations to obtain credit lines that can only get them in trouble.”
He provided an example of the problem:
Consumer A lists $100,000 in income and $300,000 in debt. Consumer B lists $0 in income and $0 in debts.
Neither consumer A nor consumer B would be approved, whether the person had applied independently or jointly. However, if consumer B is married to consumer A and applies claiming the household income, consumer B would look like someone with $100,000 in income and no debt and would most probably get approved for a high line of credit.
“Therein lies the problem,” Papadimitrious said. “The family still wouldn’t be able to afford this new line of credit and will ultimately default. The bank will end up losing money in the long term, and if this happens across the board, the entire economy would be put at risk.
The most logical answer, he said, is to require all credit card companies to accept joint applications. This would enable issuers to evaluate whether a couple’s combined income and debt obligations allow them to afford a new line of credit, and since both parties will list their individual Social Security numbers on the application, information would be relayed to both their credit reports.
“This obviously does not solve the issue of equality in the household or provide independent options for people in abusive relationships,” Papadimitrious said. “That is why we should also adjust underwriting rules for secured credit cards.
“If an applicant can place a deposit for a secured card, they should be approved,” he said. “Issuers will be assured of getting paid back and cardholders will have an independent means of spending and building credit.”