You may never know when it happens, but lenders may begin guessing your income before they approve your credit application when the new Credit CARD Act takes effect on February 22.
The new law requires lenders to consider your ability to pay any new or additional debt before approving a credit card application. While they could do something as simple as ask you, they may want to verify what you tell them.
Since most people don't carry around a pay stub when they go shopping, if you decide to apply for a credit card during a shopping trip, the stores may look for a clue about your income when they ask for your credit score.
"Retail stores are quite upset about this change in the instant approval of their cards," Bill Hardekopf, CEO of LowCards.com, wrote to WalletPop by e-mail. "Consumers now need to show proof of income when they apply for a card, and not many of us carry this around when we are shopping in the mall."
Hardekopf explains that instant credit is "such a big part of a store's marketing" because once you apply, you're part of their mailing list and they "send you all sorts of correspondence about special offers, sales, etc." He reports that he's heard retailers are asking Congress to amend this part of the bill to allow at least a minimal amount of credit, maybe $500, so they can continue employing their marketing strategy.
But Hardekopf doesn't think requiring an income check is such a bad idea. "If you don't have the income to pay the bill, you don't need the credit," Hardekopf said. He says the problem is that it takes time to do an income verification because people shift in and out of jobs or have second incomes.
Nichole Mustard, vice president of strategy for Credit Karma, told me in a telephone interview that credit reporting agencies have been guessing at income for a long time based on your credit usage, payment history and credit availability. While the accuracy of these income estimation models do vary, right now, she says these models are right about 75% to 85% of the time.
But Mustard believes that as income becomes a more important factor in credit making decisions with the new provisions of the CARD Act, the credit reporting firms will improve their data collecting and software programs for guessing income.
Credit issuers also have the ability to access an Equifax database, called the TALX database, which includes data from 150 million employment records. These databases are now used primarily by human resource personnel to check the accuracy of a job application, but they could be used for credit approval as the data from these income sources may become more critical in credit applications.
Mustard didn't think income information guessed by credit reporting agencies would ever be used to deny credit because the law requires that a person denied credit get access to the sources used. She does think it will be used to determine the level of credit offered. For instance, if a credit card issuer questions your stated income, the issuer may offer a lower credit line until they get experience with your credit usage and payment history.
You can expect to experience a different level of interest in verifying your income after February 22. Unfortunately right now, there's no law requiring the credit bureaus to give you access to their guesses. Hardekopf wonders if there should be some provision that allows you to dispute an income guesstimate, but that's not currently in the law.
Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Improving Your Credit Score."
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