Credit facts, fiction for homebound spouses
If you don’t bring home a paycheck, the Federal Reserve doesn’t think you should get a credit card. Last year, the central bank clarified that credit card issuers must consider an individual’s income, and not household income, in qualifying applicants under the Credit Card Accountability Responsibility and Disclosure, or CARD, Act of 2009.
The thinking was the requirement would keep college students from getting access to credit and digging themselves into debt before graduation. The unintended consequence was shutting out stay-at-home parents from obtaining a credit card on their own.
This caused a stink on blogs across the web, with charges of “inequality” and “patriarchy.” Stay-at-home parents worried, rightly so, how the new rule would affect their ability to have credit in their name and to build a solid credit history for the future.
Among those concerns, though, many fallacies popped up about credit, debt and marriage. Here are four frequent fictions populating the blogosphere and the real story on the misconceptions.
‘I can never get a credit card!’
Stay-at-home parents still can get a credit card if they apply jointly with their spouse for a card or if they’re added as an authorized user on a spouse’s existing account. What will be difficult is for the homebound parents to get cards on their own.
The Fed’s ruling doesn’t specify how much income is necessary to qualify for a credit card. It simply states that the issuer must confirm that the applicant has the ability to make payments, says John Ulzheimer, president of consumer education at SmartCredit.com.
So, if you bring in a little money every year through a small home business or freelance consulting work, that may be enough to qualify you for a credit card. On the downside, the smaller income could restrict your credit line.
The Fed’s rule isn’t retroactive, so any credit cards you already have in your name won’t be taken back.
“There’s no CARD Act policeman running around closing credit card accounts,” says Ulzheimer.
‘I can’t build credit!’
It’s true that credit cards help to build credit but so do other loan obligations. Having plastic isn’t crucial for your credit if you’re a stay-at-home mom or dad.
Paying your mortgage, auto loan or student loans on time will lift your credit score if your name is on the loan, either individually or as a co-signer, says Anthony Sprauve, a spokesman for myFICO.com. You also build credit history by being a joint account holder or an authorized user, or AU, on credit cards, Sprauve says.
Both FICO and VantageScore use AU accounts in calculating credit scores, and major credit bureaus Experian, Equifax and TransUnion include those accounts in consumers’ credit reports. But Experian only adds AU accounts if the payment history helps the authorized user, says Rod Griffin, public education director at Experian.
“We will remove an authorized user account from the authorized user’s credit report if any negative history, such as late payments, is reported,” he says.
TransUnion and Equifax include all payment history, negative or positive, on an authorized user’s credit report.
‘All our debt is shared.’
The rule that only your income qualifies you for a credit card may seem unfair if you and your spouse split the chores, share the household income and make financial decisions together. You also share any debt your household takes on, no matter who signs up for it, right? Not legally.
While you and your spouse may have agreed to assume debt together, that’s not how the creditor sees it. The person who signs up for the credit card is responsible for the credit card debt.
The issuer can go after only you for payments. Your spouse won’t be hassled for paying. (The same goes for any kind of debt you got before you and your spouse married, such as student loans.)
There’s a big exception. Nine states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — have community property laws. That means if your spouse signs up for a credit card or other loan and both of you benefit from that, you both share the debt obligation.
Household income can be considered on credit card applications for residents of the community property states under the Federal Reserve’s ruling.
‘We have the same credit history.’
Couples often assume that when they marry, their credit histories merge. That’s not true. Your credit reports are separate, though they may show some of the same information if you sign up for new debt together or form joint accounts.
Still, your spouse’s credit affects you, particularly when you’re a stay-at-home mom or dad and relying on your spouse’s income. If his or her credit is bad, then your household will wind up paying higher interest rates on loans or credit cards. Your good credit will mitigate that if you sign up jointly.
If you both have income, then the spouse with better credit can take out auto loans and credit cards for the two of you if that person’s income is enough to qualify. But when it comes to qualifying for a mortgage, you may need to use both incomes. And your spouse’s bad credit may hurt you.
The best strategy is to improve any credit issues in a relationship early on.
“It’s an odd thing to do in a serious relationship, but it’s good to be prepared,” says Griffin. “At some point, say: ‘Let’s stay in tonight and look at our credit reports.'”