Credit Card Offers: How to Report Income on Your Credit Card Application
If you have a job with a fixed
annual salary, reporting your income on credit card applications is easy. But
for millions of students, stay-at-home parents, hourly-wage workers and
freelancers, reporting annual income is much trickier.
You want to tell the truth, but
the applications rarely make it clear how you should calculate such a number.
What’s an honest consumer to do?
What
counts as income
Before the Credit CARD Act of
2009, it seemed as though everyone with a pulse could get a big credit line.
Today, that’s no longer the case. The CARD Act requires lenders
to extend credit only when they believe the borrower has the
ability to repay it. The income you report on your credit card application is
one way creditors decide how much credit they should extend to you, if any.
According to an amendment
to the CARD Act, borrowers over 21 can list any income to which they have
“reasonable expectation of access.” This broad definition includes:
- Personal income
- Income from a spouse or partner
- Allowances and gifts
- Trust fund distributions
- Scholarships and grants
- Retirement fund distributions
- Social Security income
Borrowers between ages 18 and 21
can report only independent income, which typically includes:
- Personal income, including regular allowances
- Scholarships and grants
Right now, there are no specific
legal guidelines about how irregular income should be calculated. But
generally, you should report only income that can be verified by tax returns, a
letter or some other document.
“Use common sense,” says Ira
Rheingold, executive director of the National Association of Consumer
Advocates. “If you can’t prove the income exists, you shouldn’t list it.”
Remember, when your issuer assigns
you a credit limit based on your income, it’s not a trust fall. If you default,
your creditor won’t be there to catch you; it’ll be asking for
its money back.
What
doesn’t count as income
It’s not a good idea to state
borrowed money, including student loans, as income. Although there’s no
specific law against it, such reporting would go against the spirit and intent
of the “ability to pay” clause in the CARD Act, Rheingold says, and could hurt
your finances.
“It’s debt, it’s not income,” he
says of borrowed money. “In my mind, it’s a really bad idea, bordering on the
absurd.”
When the loans come due, paying
back the balances on your cards could prove difficult.
When
issuers check your income
Most card issuers use a consumer’s
stated income on applications when issuing a card. But in some cases, your
creditor may ask to you to verify your income or use an income
modelling algorithm to estimate your earnings, explains Natalie Daukas, a
senior product manager at Experian.
INCOME MODELING
Income modelling algorithms,
produced by credit bureaus, estimate your income based on your credit report
information. Creditors typically use these to double-check stated incomes
or determine credit line increases on existing accounts, Daukas says. For
credit card companies, these estimations are an easy way to quickly assess a
borrower’s financial standing, without requesting access to tax documents and
other verification.
FINANCIAL REVIEWS
If you’re spending a lot or
applying for several cards within a short time, some creditors will run
what’s called a financial review to verify your income. Such reviews are
expensive for creditors to conduct, though, and tend to be rare.
During such a review, you may be
asked to provide tax returns and other documents to verify your income. If you
can’t provide proof of your reported income, the creditor may lower your credit
limits or close your accounts.
What
happens if your estimated income is off
Estimating your annual
income in good faith and coming up short is completely
understandable. Inventing self-employment income, grossly inflating your actual
income or listing a nonexistent employer, though, is a different matter
entirely.
If a creditor can prove
in court that you committed fraud when applying for a certain card, it
could make that debt unable to be discharged in a bankruptcy preceding,
says Scott Maurer, an associate clinical professor of consumer law at Santa
Clara University. On very rare occasions, people
have also been convicted of fraud for lying about their income on credit card
applications, resulting in steep fines and jail time.
But if you’ve reported your
income to the best of your knowledge, don’t worry about this.
“Proving fraud is not easy, and a
consumer who truthfully lists monthly income that happens to be irregular is
not going to come close to losing such a suit,” Maurer says.
The
bottom line
Listing all the income you have
access to can help you secure a higher credit
card offers line and therefore more spending power. But it doesn’t mean
you’re immune from overspending. Borrow sparingly, try to avoid carrying a
balance and readjust your budget if you face an unexpected income change,
such as a job loss or a pay cut.
Your creditor will do only so much
to prevent you from defaulting, based on your stated income. The rest is up to
you.
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