It will be even tougher to get new credit cards after February 22, 2010. That’s because provisions of the Credit CARD Act will require lenders to consider a borrower’s ability to repay debt before opening a new credit card – or before bumping up the borrower’s current credit limit. (I do hope those issuers who slashed credit limits for good customers are regretting it now.)
The Federal Reserve Board is charged with implementing rules that lenders will use as guidelines when following the new law. On September 29, 2009, the Board issued the following proposed rule:
“A card issuer must not open a credit card account for a consumer under an open-ended (not home-secured) consumer credit plan, or increase any credit limit applicable to such account, unless the card issuer considers the ability of the consumer to make the required minimum periodic payments under the terms of the account based on the consumer’s income or assets and the consumer’s credit obligations.”
Interestingly, credit reports have never been a source of income information for lenders. And even the employment data they include has been known to be unreliable. But seeing an opportunity, two of the three credit reporting agencies have launched services to provide income information to lenders.
Experian? just released two products, Income Insight and Income View, describing them as…”the definitive source for determining consumers’ ability to pay.” Income Insight creates “an estimate of a borrower’s individual income utilizing verified income data and proprietary credit bureau attributes.” Income View, on the other hand, relies on verified income via the Internal Revenue Service (IRS).
Equifax is also offering a number of products that include IRS-supplied income information, employer-verified income, and estimated household or individual income. In order to help lenders assess the capacity to repay the debt, Equifax also offers products that measure applicant’s discretionary and disposable income.
However, any entrepreneur who has applied for a mortgage lately knows how difficult it can be to prove adequate income to support a loan. My mortgage broker, Jeanine Thomas of J.Thomas & Co. Inc. in Sarasota, who helped me get my mortgage a few years ago when it was much easier for self-employed borrowers, tells me that “mortgage approvals are harder to come by for even the most qualified borrowers.” For business owners it’s even more complicated, since we have to show adjusted gross income over the last two years of filed tax returns. Of course, our tax returns are more complicated and our income can fluctuate significantly.
I don’t mean to alarm small business owners here. Keep in mind that the Credit CARD Act applies to consumer credit, not business credit, and it may be that if you apply for a small business card, issuers won’t verify your ability to pay. But most issuers of small business credit cards also issue consumer credit cards, and it wouldn’t surprise me if they follow the same rules. Of course, if you are hoping to get more personal credit cards to fund your business, these rules will apply.