Starting February 22, new credit card rules require banks to make sure credit card applicants can afford to repay their debts before giving out a new credit card or approving a credit limit increase. Most credit card applications already ask for income, but banks will have to go a step further to ensure the income you listed is your actual income.
Some credit card issuers may begin asking for recent pay stubs or tax returns as a way to prove your income is what you’ve listed on your credit card application. But this could be a problem for retail stores and other credit card issuers who typically give instant approval. Think about it: How comfortable would you feel giving out your monthly or annual income to the sales clerk at your local department store?
Retail stores initially protested the income requirement, saying it would prevent them from instant approval credit cards. But the Feds held that even low limit credit cards, like those from department stores, need to verify income before approving applications.
Credit bureau income estimator tools
A solution came from credit bureaus, like Experian and Equifax. Credit bureaus have developed a way to estimate income. The income estimates are based on information in your credit report, like employment and the amount of your mortgage and credit limits.
Because credit bureaus can only calculate an estimate, it’s possible for your income to be estimated inaccurately. For example, if I make $80,000, rent an apartment, and only have a few credit cards with low limits, does that mean my income will be estimated lower than someone with the same income who has a $300,000 mortgage and $30,000 in available credit?
Estimates may not be accurate
According to CreditCards.com, a rep from Experian says that 80% of incomes reported as less than $35,000 could actually be higher than that. The rep also says that credit card applications shouldn’t be denied based on those income estimates. While you might not be turned down for a credit card application based on a credit bureau’s income estimate, the application process could become more complicated as banks would have to have solid proof that your income is what you’ve said it is.
Unfortunately, it hasn’t been confirmed that income estimates from credit bureaus will be available for consumer purchase. They won’t start appearing on your credit reports, for instance. So, there’s no way you can verify that your income estimate matches your actual income.
Your role in making the application process easier
These income estimates could be widely used, so it becomes more important than ever to make sure the information in your credit report is accurate. That means checking your credit report frequently during the year to verify your employment information, loan amounts, and credit limits.
If you know you’re going to apply for a credit card or loan soon, gather income documentation like recent pay stubs and your last tax return. Expect the application process to take a little longer than normal while banks get used to the new income verification process.
Of course, there’s a bright side for people who apply for credit cards just to get the discount at store registers – you may be denied a credit card you can’t afford and really don’t need.