When you apply for a credit card, your lender bases the approval decision on your ability to repay the debt. Lenders check your credit report to see if you have satisfactorily repaid loans and credit cards in the past. Lenders also take your income into account to see if you can actually afford to take on more debt. Every credit card application includes some kind of attempt to gather income information. However, methods vary, and the application process doesn't necessarily include actual income verification.
Lenders use your income information to calculate your debt-to-income ratio. This equation is produced by dividing your monthly debt payments into your gross monthly income. Credit card payments vary based upon card usage. Consequently, lenders usually base this DTI ratio on the premise that you've maxed out your credit cards. Every lender sets its own DTI cap. You can't borrow any more money if your DTI exceeds this cap. If a credit card company caps DTI at 50 percent, you can't borrow any more money if you earn $2,000 a month but already spend $1,000 on debt payments. DTI limits prevent you from getting in over your head in debt.
Credit Card Act
To some extent, income calculations have always played a role in the credit card approval process. However, this part of the underwriting process was written into federal law during 2009. Section 150 of the Credit Card Act states that a lender must consider a borrow's ability to make payments before extending credit. The same rules apply to lenders considering increases on existing credit lines. The law does not elaborate as to how this information should be gathered.
When you apply for a credit card, you must tell your lender how much you earn. You can do this either verbally or in writing. Income sources can include wages, bonuses, rental income and separate maintenance. You cannot use student loans or other borrowed funds as income when applying for credit cards. Most banks take you at your word as long as your stated income seems realistic based upon your job or occupation. If it doesn't, your lender may ask you for supporting documentation such as pay stubs. Some lenders also obtain tax transcripts from the Internal Revenue Service.
The original version of the Credit Card Act made it difficult for homemakers and non-working adults to qualify for credit cards due to a lack of income. However, the Consumer Financial Protection Bureau amended the act in 2013 to make it easier for stay-at-home adults to qualify for credit. Under the amendment, spouses and partners of working adults can apply for credit on the basis of household income. A lender querying household income will have to verify pay stubs and/or tax returns for people other than the actual applicant.
- Board of Governors of The Federal Reserve System: New Credit Card Rules Effective Feb. 22
- Consumer Financial Protection Bureau: The CFPB Amends Card Act Rule to Make it Easier for Stay-at-Home Spouses and Partners to Get Credit Cards
- U.S. Government Printing Office: Credit Card Act
- Experian: Income Is Not Part of Credit Report so Cannot be Updated by Experian
- U.S. News: Are You in Over Your Head?
- NASDAQ: Government Shutdown Obscures Credit Card Applications
- AnnualCreditReport.com. "All about credit reports." Accessed Aug. 27, 2020.
- Discover. "FREE Credit Scorecard with your FICO Score." Accessed Aug. 27, 2020.
- myFICO. "Free Credit Scores Estimator: Get Your Estimated FICO Scores Range." Accessed Aug. 27, 2020.
- U.S. Congress. "H.R.627 - Credit CARD Act of 2009." Accessed Aug. 27, 2020.