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If you are applying for a credit card, you will be asked for your income. For some people, such as a single person who has only one paid job, this is a simple question. However, for a lot of people it gets more complicated. Income can take many forms: salary, wages, tips, dividends, or payments from others. In addition, many people do not work outside the home or depend on the income of a spouse or partner. What do they have to report as income?
If answering the income question on a loan application is a source of anxiety, read on to learn more about why banks ask this question, what income can count, and general guidelines to consider. account when applying for credit.
What banks count as income
The source of truth about what banks may consider income for the purposes of credit card applications can be found in the Consumer Financial Protection Bureau’s official interpretation of 12 CFR Part 1026, particularly in its commentary for 1026.51 Ability To Pay .
The regulations set out requirements for how banks should consider income and assets when issuing credit cards or credit card increases and give specific examples of the types of income that can be taken. taken into account when granting credit.
What this means for banks is that they must take into account a consumer’s ability to make minimum payments when granting credit and that this ability to make minimum payments can be based on the current or reasonably expected income. The CFPB recognizes that income comes in many forms and takes this into account when advising banks on what to expect.
Payments that matter
Most of the payments you receive directly can be considered income. This includes employment income, including full-time, part-time, seasonal, temporary, military and self-employed income. It also includes income from things like investments, annuities, or retirement benefits. Here are some examples of payments that count as income:
- Salary and salary
- Payment premium
- Interest and dividends
- Retirement benefits
- Public assistance
- Separate alimony, child support and maintenance payments
In addition, banks are able to take into account both current income and reasonably expected income. For example, if you were recently laid off but plan to return to work, you can report your past earnings if you have a reasonable expectation that this number represents your future earnings.
Alimony and child support income
Many banks have language in credit card applications such as “Alimony, child support, or separate maintenance income need not be disclosed if you do not want it to be considered a basis for repayment of this obligation. “
This language means that you can choose not to include these payments. The intention is to allow credit card applicants to exclude income that may already be allocated to a person’s basic support. If your reported income decreases because these types of payments are not included, you may be eligible for a lower line of credit.
Payments that don’t count
While most of the payments you receive can be counted as income, the exception to this rule is if you receive payments that you do not have access to. For example, if you entered wages for student loan debts, tax debts, child support, or alimony, these would not be included in income.
Money you can access can count
In addition to your direct income, the CFPB allows credit card issuers to take into account third party income to which an applicant has access. This rule is intended to allow people who do not work outside the home, in particular home spouses and spouses who depend on the income of a spouse or working spouse, to access credit. If you have access to another person’s income, in some cases you can count that person’s salary as income for the purposes of a credit application.
For example, if you share a joint account with another person and that person’s salary is regularly deposited into that joint account, you may consider those deposits to be part of your income. Additionally, if a state or local law grants you a property right over another person’s income, you can usually use that person’s income when reporting income on a credit card application.
Also, if someone else gives you periodic payments or pays your expenses regularly, you can count those amounts as income on credit applications. For example, if you have a sublet roommate from you who makes direct payments to your landlord against your rental obligation, you can consider those payments as income on your loan application.
Special rules for children under 21
The Consumer Financial Protection Bureau imposes special limits for banks issuing loans to people under the age of 21. According to office rules, borrowers under 21 must have the independent ability to make required minimum payments or have a co-signer who is 21 or older. and who agrees to become responsible for the debt on the account.
This usually means that a person under the age of 21 cannot count the income of other people to whom they may have access when reporting income on a credit card application.
The credit card application will guide you
It is important to note that the regulations covering the types of income that can be taken into account when granting credit are regulations that apply to banks, not to individual consumers.
When you apply for a loan, the bank will tell you what income to declare on the application. Here is an example from a Citibank credit card application:
Total annual income:
Examples: Salary, salary, interest, dividends, rental income, pension benefits. If you are 21 or older, you can include other people’s income that you can reasonably access to pay your bills.
You are not required to include alimony, child support, or separate maintenance income if you do not want it to be seen as a basis for repaying this obligation.
As long as you make a good faith effort to report your income accurately according to the bank’s guidelines, you will be fine.
Consequences of incorrect income declaration
It can be tempting to over-report your income. After all, a lot of income can mean a bigger line of credit. However, this is a bad idea and can have serious consequences. The bank that issued your credit card uses your income information to estimate your ability to pay and only give you the amount of credit it thinks it can repay. Having the ability to spend far beyond your means can cause financial problems for many people.
Additionally, if a credit card issuer finds that there is something unusual about your spending habits, they may ask you to undergo a financial review. A financial review often involves submitting documents, such as recent pay stubs or a tax transcript, so that a lender can verify your reported income. If you decline to participate in a financial review or if your financial review reveals that your income was significantly different from what you stated, the credit card issuer can use it as a basis for reducing your lines of credit, you deny future credit or close your accounts.
While rare, lying about your income can have consequences beyond closed accounts. This could include civil penalties and adverse actions if you file for bankruptcy and seek discharge from your debts. In the most extreme cases, lying about your income could land you in jail.
When reporting your income on the credit card application, the best advice is to follow the instructions given on the credit card application and remember these three rules:
- Be honest. Remember that false income tax returns can have consequences ranging from adverse actions like lowering credit limits to criminal penalties.
- Declare the income to which you have access. Report your salary and payment income and report your spouse’s or partner’s income if it is deposited into a joint account to which you have access.
- Don’t overthink it. No one is asking you to indicate exactly on which line your adjusted gross income will appear on next year’s tax return. All that the credit card application takes is your best estimate of your current income or what you expect from your income.
Making a good faith effort to accurately report your income on a credit card application will ensure that your bank is able to properly assess your application and that you will receive a line of credit that matches your ability to pay.