January 21st, 2010
Issuers Consider Your Income As Factor In Credit Card Approval
The Credit CARD Act requires issuers to consider an applicant’s income—as estimated by the credit bureaus—when considering credit card approval. This provision in the CARD Act, which goes into effect Feb 22, ushers a new era of tightened lending and stepped-up regulations on consumer credit that will help deter the lax lending practices that fueled the financial crisis.
The three big credit bureaus will estimate consumers’ income based on credit report information like a consumer’s credit limit and size of mortgage. In turn, issuers are required to consider potential applicants’ income, as well as outstanding debt, ability to pay, and assets, before approving a new credit card. Credit scores may not longer be the key factor in lenders’ future credit decisions.
Supporters for the reform are hoping that disclosing income as part of a credit card application will make consumers think twice before opening a retail credit card when tempted at stores with the lure of discounts or incentives. Retailers like Best Buy and Macys sent complaint to the Feds, reports the Washington Post, but consumer advocates suggest that the provision should be even more stringent and require issuers to verify, not just estimate, income information.
Banks and credit card companies have been collecting more and more financial information on consumers as of late in order to better gauge creditworthiness and reduce risk and losses. Credit card companies such as Bank of America, Chase, and Capital One have been requesting household income estimates, bank account amounts, and mortgage/rent payments as part of their online card application. While issuers are prohibited from turning down an applicant based solely on their income, the income estimate opens the door to issuers asking for more details and income verification. The Wall Street Journal reports that income estimates from credit bureaus could also be used to determine credit limits, calculate debt-to-income ratio to determine if a borrower is over-extended, and even be used by collection agencies to determine which consumers are most profitable to pursue.
The Wall Street Journal suggests a few safeguards for your credit report as income estimates becomes standard practice in the credit card industry:
- Check your three credit reports often to make sure the debt data in your report is accurate.
- When applying for a credit card, a loan, or a mortgage, pay attention to the fine print in applications that may ask to have your employment verified.
- If you are asked to fill out a Form 4506-T, date the form and to fill in the year(s) which the lender can request returns so you know which information will be made available.
- Lesser-known credit bureaus may begin collecting other personal information such as utility payments, cable and cell phone bills, and bank accounts. All of your financial information—not just your credit score—can make a difference in your future financial options.
At Credit Karma Blog, what goes around comes around… So what do you think about this post? Agree, disagree, or have something more to say? We’d love to hear your reactions!
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Of course Macy’s is pushing back since they charge the highest APR of any card service I personally own. I think there are a lot of good things coming out of the card ACT and some not so great.