There are more than 16 million stay-at-home spouses in the United States, and they're currently in an unenviable position. Not only are they largely closed off from credit, but they've also found themselves embroiled in a debate that pits their consumer rights and well-being against the soundness of the nation's banking system. The question is: Can we reach a resolution that makes everybody happy?
Before we answer that question, a bit of background is obviously in order, and the story begins with the Credit CARD Act of 2009. In addition to instituting a number of new consumer protections, this piece of reformatory personal finance legislation fundamentally changed the credit card application process. Rather than continuing to allow consumers to list the imbalanced data points of household income and personal debts on their applications, the law instituted a system that requires credit card issuers to verify one's independent ability to make payments in light of their personal income and assets.
Therein lies the rub for stay-at-home spouses. If you don't have independent income, how can you open a credit card account?
You might at first think that's a rather trivial question, but consider how important your credit standing is: It impacts your credit card and loan terms, job prospects, ability to rent an apartment, chances of getting access to a vehicle, insurance premiums, and much more. You can't simply rely on your spouse's credit or your past experiences either because no one wants to add the burden of starting over financially to the trauma of divorce or death and you have to keep positive information consistently flowing into your credit reports in order to maintain solid credit.
The Flawed Proposal
The Consumer Financial Protection Bureau (CFPB) has proposed that we rectify this "unintended consequence" of the CARD Act by allowing the use of third-party income on credit card applications. While the CFPB has generally done an excellent job in its brief lifetime, there are two distinct reasons why it clearly missed the mark here:
- The proposal promotes consumer overleveraging: The ability to list third-party income next to individual debts on a credit card application obstructs the issuer's ability to accurately assess the applicant's ability to pay. For all the issuer knows, the listed income could already be committed to prior debt obligations of the applicant's spouse. People who can't afford a new credit line will therefore inevitably get approved, while many deserving applicants will receive less-than-optimal terms.
- It also jeopardizes the soundness of the banking system: Widespread consumer overleveraging places a burden on the banking industry, as institutions are forced to eat significant losses. The CFPB's proposal could therefore lead to more expensive banking products and a lot of people losing their jobs.
A Realistic Solution
We at CardHub.com have come up with what we feel to be a win-win solution to this issue. Instead of reverting back to a shared income application system, the CFPB should:
- Waive income requirements for secured cards: Secured credit cards naturally shield issuers from risk in that cardholders are required to place a refundable security deposit that doubles as their credit line. There's simply no need to also verify an applicant's independent income. Relaxing this requirement would pave the way for anyone with200 (the minimum deposit typically required) to access credit.
- Require joint applications: Some credit card companies already offer joint applications, which allow couples to apply together for a shared account using both parties' income and debts. Such accounts therefore give issuers the underwriting perspective they need, while enabling stay-at-home spouses to build credit under their own names without independent income.
Whether you agree or disagree with our proposal, I think it's obvious by now that we can't side with the CFPB on this one. So, if you have a better idea of how to fix the problem, let the new regulatory body know about it. Its proposal is open for comment until Jan. 7, 2013.
Odysseas Papadimitriou is a former Capital One senior director who decided to enter the world of entrepreneurship in 2008. He initially founded the credit card comparison website Card Hub and, later, developed the personal finance social network Wallet Hub, where you can read reviews on personal finance companies and professionals.