Friday, October 19, 2012

Stay-At-Home Spouses May Get Credit Cards With CFPB Help

English: First 4 digits of a credit card
(Photo credit: Wikipedia)

The Consumer Financial Protection Bureau(CFPB) is proposing a new rule to make it easier for stay-at-home spouses to obtain a credit card.

The CFPB proposal allows 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 CFPB Director Richard Cordray in a statement. "Today the CFPB is proposing common-sense changes that would facilitate credit access for spouses or partners who do not work outside the home."

A 2009 CARD Act provision currently mandates issuers look at a consumer's individual income, rather than their household income, when deciding to approve that consumer for a credit card. The rule originally tried to prevent young adults from using their parents' income to obtain a credit card and subsequently ringing up too much debt in their own name. The unintended consequence of this provision is that it hurt the stay-at-home spouse that generates little or no income.

Is this a positive move forward?


When partners or spouses are denied credit because they do not have the income needed, it makes sense to deny them a credit card. But what if the partner or spouse can share their credit worthy status and show that their income will be the source of the ability to pay back debt. Would that make sense.

It could work if the spouse with the income would take responsibility for the debt to be paid if the account went into default. This works when a cosigner is need for a car note. If the borrower defaults the creditor goes after the cosigner. I works there so why not use it with credit cards.

What are the problems with the CFPB proposed rules?


When credit card issuers issue credit they have a reasonable expectation that when someone applies they are not overstating income. The reason why the rules are the way they are now is because household income is different than individual income. If one spouse applies for a credit card and indicates they make $50,000 in income, the credit card company issues an amount of credit based on credit history and other debts.

Now the spouse who doesn't have an income also applies for a card and indicates $50,000 as household income under the proposed CFPB   rules. The spouse probably doesn't have any debts, so the credit card looks on the applicant as a good risk not knowing about the any debt. This can't work.

In other words, allowing applicants to list shared income and personal debts is a recipe for disaster.  Considering the rate at which we’re incurring debt now, the last thing we need is to open the floodgates by diluting the effectiveness of underwriting.

The Solution


Instead of reversing course and allowing consumers to list shared income on credit card applications, the CFPB should first require that all credit card issuers accept joint applications.  This would enable couples to apply together, listing both of their Social Security Numbers as well as their combined incomes and debts, thereby allowing underwriters to make truly informed approval decisions and giving both applicants the ability to build independent credit.

Instead of reversing course and allowing consumers to list shared income on credit card applications, the CFPB should first require that all credit card issuers accept joint applications.  This would enable couples to apply together, listing both of their Social Security Numbers as well as their combined incomes and debts, thereby allowing underwriters to make truly informed approval decisions and giving both applicants the ability to build independent credit.



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