Among the less controversial provisions of the Credit CARD Act of 2009 were a series of rules designed to protect college students from going too deeply into debt. The law bans promotional gifts to students, requires colleges to disclose relationships with credit card issuers, and requires that all applicants must either have a co-signer or verify their own income. The law disarmed many of the traps and pitfalls of college student credit cards.
It is this last provision that came under fire when the Federal Reserve issued a clarification on March 18th, ,2011. The Fed ruled that “credit card applications generally cannot request a consumer’s ‘household income’ because that term is too vague to allow issuers to properly evaluate the consumer’s ability to pay. Instead, issuers must consider the consumer’s individual income or salary.” Theoretically, this clarification would prevent students whose parents are the primary earners from incurring high debt that they are unable to pay off.
Intended for students, applied to everyone
But another group may be affected by this provision – stay-at-home parents, particularly stay-at-home mothers. Because they do not draw a steady paycheck, homemakers do not have an individual income. Before the new rules were implemented, they could use their spouse’s income as proof of their ability to pay. Now, because household income cannot be considered, they must have their spouse as a co-signer or accept higher interest rates and lower credit limits. While community-property states give both spouses a joint interest in the household’s income, only nine states do so.
The Federal Reserve said in its clarifications, “A consumer who does not have sufficient income to open a credit card account independently can open an account by applying jointly with a spouse who has sufficient income. The Board understands that a joint application could be inconvenient or impracticable in certain circumstances…However, the Board does not believe that these concerns warrant permitting issuers to extend credit based on the income of persons who are not liable on the account.”
The intent of the law was to keep excessive lines of credit out of the hands of students, who may come from well-off households but may not have the discipline or earning power to pay off their debts themselves. According to Linda Sherry, director of national priorities for Consumer Action, “We want to stop [issuers] from giving people enough credit to hang themselves with.”
Should the individual income provision extend to stay-at-home parents?
Some believe that the law is effective and necessary to ensure a sound banking system: CardHub.com CEO Odysseas Papadimitriou says, “This is Underwriting 101… you can only lend to people who can afford to pay it back. If couples could apply for credit cards together and, in doing so, both provide their Social Security Numbers, then both individuals would be responsible for misuse and both would build individual credit history. This would let stay-at-home parents build their own credit, even if they do not have their own individual income.”
But others, including key players in the CARD Act’s passage, believe that the proposed legislation will adversely affect non-working spouses. Representatives Louise Slaughter and Carolyn Maloney, both Democrats of New York, sent a letter to the Federal Reserve Board in January detailing their objections.
“The Board’s proposal will hamper a stay-at-home mom’s ability to establish her own credit history by applying independently for a card. Many stay-at-home moms have a strong work history, yet the proposed regulations ignore their demonstrated credit-worthiness because of their lack of current market income.”
The CARD Act’s unintended harm to domestic violence victims
What’s more, the rules may be disastrous for women in abusive relationships. Rene Renick of the National Network to End Domestic Violence noted that financial abuse was one of the most significant and least appreciated methods of controlling a victim. Not only can an abusive partner misspend, overdraw on or pull the assets from a joint account, but he can use the statements to track a victim who tries to leave. If a victim is tied to a joint account, she may be saddled with her partner’s debt or be hit with a bad credit score that limits her ability to receive lines of credit or even rent an apartment.
“Financial abuse occurs in 98% of abusive relationships. I can’t tell you the number of women who’ve said, ‘One of the reasons I stayed in the relationship longer than I wanted, or came back, was the finances. I was afraid I wouldn’t be able to feed my kids,” says Renick.
“[The regulations] will limit a woman’s ability to have access to assets on her own. Because batterers need to have power and control over their partner, they will more than likely use this to restrict her access and to keep her entrapped in the relationship. The Board argues that a married stay at home spouse can still establish credit through a jointly held card, which of course is true. However, if the batterer mismanages the credit cards held jointly her credit score will be harmed as well.”
In their letter to the Fed, Representatives Maloney and Slaughter remark, “Women trapped in abusive marriages may be unable to work due to a controlling spouse…the availability of an independent credit card may represent her best chance at establishing independence and a path out of a dangerous relationship.” That chance may be jeopardized by the individual income requirement.