Stay-at-home parents who apply for a credit card to use for the holidays might get a surprising rejection. That's thanks to a new federal regulation that might prohibit them from getting approved for a card if they don't have an income of their own.
The controversial new rule took effect Oct. 1, but consumers are just now learning about it firsthand as we enter the busiest time of the year for card applications: December and January.
"There is a seasonality to applying for credit cards, and I think all of a sudden it's going to hit people: 'Oh my goodness. I'm getting rejected. Why is that?'" said Bill Hardekopf, chief executive of credit card comparison site LowCards.com.
The rule stems from the largely consumer-friendly CARD Act, which took effect in 2010 and outlawed many of the nasty practices credit card issuers used to wring more money from cardholders. But among its consequences was a clarification by the Federal Reserve this year that credit card issuers must consider only the card applicants' own income, or their own ability to pay, when granting approval for individual credit cards. Household income or combined income no longer may be considered. (Credit cards already issued are unaffected.)
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In general, the "ability to pay" rule is a good idea, consumer advocates say, so card users don't pile up debt they can't pay off. But it also means a stay-at-home spouse with little or no regular income could be rejected when applying individually for a card, whether a traditional credit card or a retail store charge card.
If you fall into the category of those who don't have an income but want a card, you have a few options.
Apply jointly: The most obvious solution for harmonious married couples is to apply jointly for a card and report the breadwinner's income. But that might become impractical when a non-earning spouse is out shopping alone and tries to apply for instant credit — to get a sales discount at a retailer, for example. And it might irritate some stay-at-home spouses that they need their husband or wife's "permission" to apply for credit.
Linda Sherry, spokeswoman for consumer group Consumer Action, said people generally should avoid instant credit anyway because any discount you get is often not worth the short-term harm to your credit score and living with another credit balance.
Become an authorized user: A non-earning spouse can piggyback on an income earner's credit account as an authorized user. That will build his or her credit history, which is a good thing if the primary cardholder pays on time.
Get an income: Perhaps it's obvious, but if non-working spouses can produce some income, perhaps from a part-time job or work-from-home job, they might be able to get a card in their own names.
Report half of household income: Concern about stay-at-home spouses not being able to get a credit card might be overblown, Sherry said. One work-around for couples who file joint tax returns is for a non-earning spouse to claim half the household income, she said. If you get rejected, appeal to a card issuer's customer service manager and offer to allow access to an income tax return, if necessary.
"I just don't think they should take no for an answer," she said. "If they file jointly, half that income is theirs, legitimately."
Nessa Feddis, vice president and senior counsel for the American Bankers Association, said she's not sure that would work. It's an example of how details of the new regulation are still fuzzy as card issuers attempt to comply with a regulation that potentially hurts their business. After all, it's in the banks' interests to issue more credit cards.
Moreover, income isn't as good a predictor of whether someone will repay as their credit history is, Feddis said. As of now, banks are being required to verify income, although how they do that is a work in progress, Feddis said.
"It's still sorting itself out," she said. "It's a challenge right now."
In the context of buying holiday gifts, however, scrambling to apply for credit cards isn't a financially sound solution. Saving and budgeting are far better, Sherry said.