Recent changes to the law on reporting income on credit card applications have made credit card household income okay again for individuals 21 and older.

Credit Card Accountability Responsibility and Disclosure Act (CARD) and reporting income

In 2009, the CARD Act changed the way credit card applicants reported income. Prior to this law, card issuers asked for an applicant’s “total household income” when completing a credit card application. At that time, young adults with no income of their own yet could include parents’ income on credit card applications if they still lived at home. Spouses and partners who didn’t work outside the home were able to report the income of the employed household member in order to qualify for credit. Another difference was a sole reliance on the consumer’s credit history to extend credit.

The CARD Act changed all that. One issue the new regulations specifically targeted was student credit cards. Banks had gotten into the habit of handing out credit cards to young adults with no personal income of their own, instead allowing them to report credit card household income. Many of these students would start using their cards indiscriminately and quickly build a balance they had no means of paying, either leaving their parents saddled with the bill or defaulting on the card and damaging their credit right out the gate.

The CARD Act established a requirement for young adults to have their own personal income to qualify for a credit card, demonstrating their ability to pay the bills for their credit card without the assistance of their parents’ income. This was referred to as the Ability to Pay (ATP) rules. Card issuers started using complicated mathematical formulas to determine whether applicants would be able to make their minimum credit card payments.

The downside to the ATP rules was their impact on stay-at-home spouses and partners. With no personal income of their own, suddenly these consumers were unable to qualify for a credit card. Finally, in the spring of 2013, the Consumer Financial Protection Bureau (CFPB) made some changes to the CARD Act regulations that addressed this problem.

The new rules allow an applicant who is at least 21 to report the income of his spouse or partner when applying for a credit card. Card issuers may consider this shared income for new applicants and for customers requesting a higher credit limit. This allows stay-at-home spouses 21 and older to use their spouse’s eligible income on their credit card application.

Therefore, these government mandated income credit card requirements now allow you to include third-party income as long as you are at least 21 years old and you have a reasonable expectation of access to this income. This could be demonstrated by having a joint checking account, because that means you have access to those funds. This includes adult children or students over 21. They may report the part of their parents’ income that they have access to. This too could be via a bank account, or through a monthly stipend. The important factor is that they have an actual expectation of access to the income they are reporting on their application.

Young adults between the ages of 18 and 21, however must still have their own income in order to qualify for a card. There is no longer credit card household income for these applicants. Their parents’ income is not eligible. Because card issuers are not legally required to verify the reported income, these young applicants typically do not have to provide proof of their income though. Instead, most issuers apply an income estimation model.

Income Estimation Models

When you apply for a credit card, the credit agency takes the information you provide, such as self-reported annual income, your social security number, birthday, and your address, and submits it to a credit reporting agency. This credit bureau uses the income models to generate an estimated income. The goal is to come within $1,000 of the applicant’s actual income.

If the estimate is off significantly, an alert is triggered and the applicant may then be required to provide proof of income.