Have you been tempted to open a credit account in your favorite store to earn a discount on your purchase or perhaps even receive a free gift? Many people have, and applying for credit cards, especially those offered at the checkout lane of retail stores, used to be a simple matter for just about everyone who did the shopping.
This included the managers of the home -- the stay-at-home moms and dads who generally had no individual reportable income but could likely get a card just the same. They'd just rely on their family's household income rather their own. Fast forward to 2012 and things are quite different.
Changes to consumer credit laws have come in the form of the Credit CARD Act -- most of which took effect in 2010. The landmark law was designed to do many things to help the consumer, including ensuring that young consumers weren't applying for more credit than they could handle. This seemingly practical approach to curbing irresponsible credit card use had a side effect, though: It made it nearly impossible for the typical work-at-home mom or dad to open an account solely in their name.
Given that many home managers do the majority of the shopping, however, it may seem to some that there should be an option for the non-income earning partner to have their own card. Is it possible, for example, to report wages of the entire household or even piggyback on an existing spouse's account?
Here are the heavy implications of the law, as well as the few workarounds available for managers of the home:
The Basics of the Law
Filling out an application for credit is a whole new process in this post-CARD Act era. Instead of seeing a line for 'household income,' applicants are questioned on their individual earnings -- something most stay-at-home partners don't have.
The new standards have been the bank's way of making sure it only extends credit based on an individual's ability to repay. It was done, to a large degree, with college students in mind. Credit card companies once flooded the mailboxes of dorms throughout the nation, aiming to pick up a few new customers. The card issuer didn't care that they were broke college students because they knew that someday they'd likely have good jobs and good incomes and become good customers. Banks were willing to take that short-term risk, even luring students in with free t-shirts and pizza for signing up for a card.
The CARD Act largely stopped that by requiring people to have either sufficient individual income to support the card, or to get someone to co-sign the card for them. That kept card issuers off-campus for the most part, but also impacted another group of people. Stay-at-home spouses typically rely on their working counterpart to repay debt and were left with virtually no way to get a line of credit without the permission and co-signature of their spouse.
So just how closely are lending institutions keeping to the new regulations? While it's tough to quantify the rate of compliance, a petition containing 33,000 signatures was recently filed with the Consumer Financial Protection Bureau, showing how the strict lending practices are affecting consumers. 'Since each violation by a lender can result in a fine as much as $5,000, the banks are playing it safe,' says Andrew Schrage of the personal finance website MoneyCrashers.com.
Solutions for the Stay-at-Home Crowd
What can stay-at-home consumers do to build the credit needed to secure a loan in today's financial climate? Aside from earning an income, the options are limited. However, Schrage shares a few potential opportunities that may apply:
- Consider opening a joint account with your spouse, or ask to be added as an authorized user on an existing account belonging to your spouse. If you opt for one of these tactics, use the card with caution, and at least pay the minimum balance due on time each month.
- If you live in one of the nine U.S. community property states -- Texas, California, Nevada, Arizona, Idaho, Louisiana, New Mexico, Wisconsin or Washington state -- see about asserting joint ownership of property. (Income is included in 'property.') Keep in mind, however, that doing so can subject you to significant debt liability if your marriage ends in divorce.
- One additional workaround that is being exploited is more applicable to college students but could work for a small percentage of the at-home segment. Consumers can now list any student loans they have as income. If you are at-home with the kids while pursuing a degree, for example, the loans you receive for classes can count as income for the purpose of obtaining a separate line of credit.
In addition to these tactics, a lower risk alternative may be to simply use a debit card for purchases instead of a traditional credit account. While not the same as getting 'credit,' it can meet the needs of many consumers with less of a chance of falling into a debt that may not be able to be repaid later. Any individual credit accounts that may have been opened prior to the CARD Act being passed should be guarded carefully and not closed in the near future.
The Investing Answer: While petitions have been started in hopes of revising the law to allow homemakers to report total household income, it's not likely that things will change soon. Building your personal net worth through a side income may be the smartest way to establish credit in your name and secure recommended Social Security credits for those retirement years.
