New Regulations Require Individual Income to Qualify for a Credit Card

In previous blogs I have discussed the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (Credit Card Act or CARD Act). The Federal Reserve approved a rule that amended Regulation Z to clarify the Credit Card Act, which became effective October 1, 2011.  Before I discuss the rules, I want to refresh your memory on both the Credit Card Act and Regulation Z.

Credit Card Act

The Credit Card Act’s purpose was to protect consumers from certain abusive practices by credit card issuers.  Some of the changes involved unfair interest rate increases and changes in terms; advanced notification of increases; how payments are applied; fairness in due dates and times. For example, the Credit Card Act required that bills be mailed 21 days prior to the due date instead of the norm which was 14 days.

Regulation Z

Regulation Z is known as truth in lending or TILA (Truth in Lending Act).  Lenders must disclose terms and conditions of consumer credit products, such as interest rates and annual percentage rates.

Highlights of Regulation Z Changes

Credit card applications must ask for the applicant’s individual income or salary, not household income, regardless of age.  This requires the credit card issuer to consider their individual ability to pay.

Card issuers that waive interest for a certain period of time for the consumer cannot cancel it, unless the account becomes 60 days or more delinquent. This waiver is usually a promotion to get the consumer to apply for the card.

Card issuers can’t charge fees of more than 25% of the account’s initial credit limit for the first year.  The fees include application and pre-approval fees.

Individual income issues

The issue causing the most controversy on this rule is individual income.  Stay-at-home spouses will not be able to get a credit card in their own name, which penalizes the spouse for staying at home.  What happened to sharing the income?  The spouse is working at home, but doesn’t receive a W-2 or 1099 to prove that they have made an income. The exception is community property states, in which the spouse’s income can be considered for the stay-at-home spouse to open an individual account.

Since more females than males stay-at-home, this change will also impact the retailers. They target female shoppers and offer them instant credit with incentives to open a retail credit card.  Since the stay-at-home-spouse won’t qualify for the card, they may not continue with the purchase without the incentives. This can hurt store sales.

The two alternatives for the stay-at-home spouse to obtain a credit card are to open a joint account with their spouse or become an authorized user on their spouses card.  On a joint account both are responsible for payment and the spouse’s income can be used.  As an authorized user, the spouse can use the account, but is not responsible for payment.

I understand that The Federal Reserve is trying to make sure that the person responsible for the credit card can make the payments but did they go too far with this?

Credit Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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