One of the pitfalls of Congress passing complicated, sweeping legislation is that sometimes provisions designed to protect one group unexpectedly create hardships for others. That's what happened with 2009's Credit Card Accountability Responsibility Disclosure (CARD) Act, which was hailed as legislation that would protect consumers from misleading credit practices.
Among other things, the CARD Act requires that people under 21 must have an adult co-signer in order to open a credit account unless they can prove their ability to repay their account balance. This provision was designed to prevent young adults from assuming more debt than they can afford and then being unable to pay it off, thereby ruining their credit standing.
So far, so good.
Then, in 2011 the Federal Reserve finalized rules around the "ability to pay" provision also found in the CARD Act. It stated that potential credit card issuers generally could only consider an applicant's independent income or assets before issuing a new card or increasing a credit limit, not his or her access to the household's overall income.
An unintended consequence soon emerged: As a result of the ability-to-pay rule, many spouses or partners over age 21 who don't work outside the home suddenly found they were unable to open separate credit accounts in their own name, regardless of whether or not they had access to their working spouse/partner's income.
Establishing one's own credit history is crucial to gaining favorable interest rates and access to credit, especially when non-working spouses get divorced or their spouse dies unexpectedly. Thus many consumers (and their Congressional representatives) were upset. Their displeasure reached the ears of the Consumer Financial Protection Bureau (CFPB), which by 2011 had assumed responsibility for administering the CARD Act.
Fast forward to October 2012, when the CFPB released a proposal that was expected to ease credit rules for stay-at-home spouses or partners. After six months of public review, the CFPB issued a formal amendment to the ability-to-pay rule that essentially says credit card applicants who are at least 21 can factor in a third party's income or assets when applying for credit card accounts if there's a reasonable expectation they'll be able to access those funds to make payments. (This includes income of a spouse or partner, although the rule applies to all applicants, regardless of marital status.)
Speaking of unintended consequences, however, remember that even though having at least one credit card or loan in your own name can help you build a strong credit history, it's important to carefully manage all credit accounts on which you're named -- whether as an individual, cosigner or authorized user -- to prevent damage to your credit score.
Having a poor credit score can cost a small fortune over a lifetime. You'll pay higher rates and have a harder time qualifying for mortgages, car loans and credit cards -- often even homeowners and life insurance premiums are steeper. And even though credit scores aren't factored into federal student loan interest rates, they are with private student loans, often resulting in rates several percentage points higher.
Here are a few tips for maintaining -- or improving -- your credit score:
- Always pay all bills on time. Set up automatic payments for recurring bills (mortgage, utilities, loans) and consider setting up automatic minimum credit card payments if you're prone to forgetting or travel a lot.
- Sign up for text or email alerts from your bank or credit union for when your balance drops below a minimum amount.
- Never exceed credit limits. In fact, the lower your credit utilization ratio (the percentage of available credit you're using), the better. Try to keep your overall utilization ratio -- and the ratios on individual cards or lines of credit -- below 30 percent.
- Don't automatically close older, unused accounts; 15 percent of your score is based on credit history. In fact, make occasional small charges on existing accounts (paying them off, of course) to make sure the lender doesn't close them out.
- Each time you open a new account there's a slight impact on your score, so avoid doing so in the months before a major purchase like a home or car.
- Pay off medical bills, as well as parking, traffic or library fines. Once old, unpaid bills go into collections, they can cause major damage to your credit.
- People who demonstrate managing several types of credit earn higher scores, so if your revolving (credit card) payments are under control and you don't have any outstanding installment loans (mortgage, car, student), consider taking out a small personal loan and paying it off on schedule. Just make sure the lender will report it to all three major credit bureaus (Equifax, Experian and TransUnion).
Bottom line: Make sure you have credit in your own name, in case you ever need to open a new account based on your own credit history. Just make sure you don't overextend yourself or mismanage credit you currently have.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.