Applying for a credit card isn’t a complicated process, but the basic information you’re asked to submit has a huge bearing on whether you’re approved.
In addition to personal data like your name, date of birth, address, and Social Security number, you’ll also be asked to state your annual income amount.
Utilizing this information, along with your credit score, the credit card company then decides whether to approve your application. Of course, your credit limit and APR are also affected by these results. But figuring out how to report your income can be a little tricky.
We’ll take you step-by-step so that you know exactly what does and doesn’t count as income. That way, you’ll have the strongest application possible to access the best terms.
Why is income considered as part of your credit card application?
Prior to 2009, there were few laws regulating credit card issuers and how they approved applications. It was much easier to qualify for a credit card at that time because there was no requirement for credit card companies to ask for the credit card applicants’ income — and they typically didn’t.
While this may sound great (credit cards for everyone!), giving everyone a credit line came with consequences. The lax regulatory environment resulted in many people going into default or bankruptcy. And, of course, this ruined their credit scores.
That all changed with the Credit Card Act of 2009. One of the new rules included in this legislation was that creditors must believe that you have the ability to repay your debt.
To figure this out, they added income as part of the information required on all applications. This helps the credit card issuer establish your ability to pay, particularly when weighed against the current level of debt listed on your credit report.
What counts as income on your credit card application?
You’ve filled out the rest of your application and are down to the final entry: your annual income. If you have a non-traditional income stream or several income streams, you may wonder what actually counts in this field.
The answer to your question actually depends on your age, thanks to the Credit Card Act. Here’s how it breaks down.
If you are 18 – 21 years old:
In this age bracket, you can only use independent income, including personal income (to include “regular allowances”), scholarships, and grants. So if you’re in school and receiving financial aid besides student loans, you can likely use it on your application.
Think about everything you receive: a work-study job, teaching assistant stipend, paid internship, or any other type of monetary supplement that you can use. Of course, part-time jobs (or a full-time job for that matter), whether you’re attending college or not, can also be counted towards your personal income.
If you have a question about a specific type of income, you can always call the credit card issuer’s customer service line. They can point you in the right direction so that you don’t make a mistake in reporting your income.
Don’t expect a high credit limit at this age, especially if it’s your first credit card. Be honest with your reported income, and they’ll get you set up with the right credit card.
If you are 21+ years old:
When you’re 21 or older, there are many more income types you can include in your application. For example, the Credit Card Act of 2009 allows for any money you can “reasonably” expect to access.
The exact phrase is open to interpretation, but you can easily include many sources in this definition. In simple terms, here is a list of some of the most common types of income for this age group:
- Personal income from one or more jobs
- Your spouse’s or partner’s income
- Gifts or stipends
- Trust fund distributions
- Grants and scholarships
- Retirement fund distributions
- Income from Social Security payments
- Alimony and child support
You can see that there are actually plenty of sources you can count as income beyond a typical 9-5 job. And if you’re not the main wage earner of your family, you can still use income from your household to qualify for your own credit card.
No matter your current situation, you have plenty of options beyond a normal paycheck to use as part of your annual income on a credit card application.
How can you use household income to qualify for a credit card?
As mentioned in the last section, you can use household income in addition to your own personal income when applying for a credit card.
Here’s exactly what that entails since the Credit Card Act of 2009. As long as you’re over 21, you can use your spouse’s or domestic partner’s income just as it were your own.
One stipulation is that you must both be able to access the money in one or more joint accounts. You certainly could just have the main earner open up a credit card account and add the other person as an authorized user. This can also help boost your credit score.
However, this method gives you the option of having separate credit histories. That being said, when applying for your own credit card, you’ll only be able to use your own personal credit history, regardless of your monthly income source.
Students Over 21
Students who are 21 or older may also use household income in the context of their parents’ earnings. However, you still must be able to have that “reasonable access” to your parent’s income. If you only get some of it, say through a monthly stipend or allowance, you may only report that much as part of your income on the application.
Roommates sharing an apartment or house may not combine incomes as an exception. You probably aren’t sharing bank accounts, and in this situation, there wouldn’t likely be any reasonable access to your roommate’s income.
When it comes to household income, we’re really just talking about spouses, domestic partners, and in some cases, parents. Remember that the two main components are reasonable access and joint accounts. You can correctly utilize this to qualify for your next credit card when you keep those things in mind.
Can loans count as income?
Technically speaking, there’s no actual law stating that loans cannot count as income on your credit card application. However, income is supposed to represent your ability to make your credit card payment. Consequently, it’s considered by most experts to be misleading if you include other debt as part of your reported income.
This includes any type of debt, such as personal loans, student loans, other credit cards, or home equity lines of credit. Except for a reverse mortgage, where an older person uses their home equity to receive monthly payments from the bank, loans don’t provide a consistent income.
After all, imagine that each one of your outstanding debts has come due at once. And on top of that, your main income stream dries up at the same time, maybe because of a job loss. Will you be able to repay your credit card with the other outstanding loan balances?
Absolutely not. Debt is a liability, not an asset. So don’t treat it as one when it comes time to apply for credit cards. Instead, answer the income question fully and accurately to avoid any future trouble.
How is income verified?
So, what’s the incentive to answer truthfully about your annual income on your credit application? In some cases, the credit card issuer may actually do some extra digging to verify your information.
When reporting your income, the best thing to do is to make sure you have some type of documentation to support anything irregular, such as tax statements.
You essentially just need some type of proof that you do indeed receive the income. Even so, there are a couple of different ways creditors attempt to verify your income. They might not do these every time, but you never know.
Documented Proof & Income Modeling
First, they may ask for documented proof of your income. In other instances, they might use income modeling, a tactic created by the major credit bureaus.
Credit card issuers use the information on your credit report to determine how much you likely earn. They can also check out whether you’ve had an increase in credit limits on your current accounts.
While some of this data are simply estimates, they do give the credit card company a fair reflection of your current finances. And from their perspective, it’s much more efficient than requesting documentation from you.
However, in some cases, the credit card company may feel compelled to perform an in-depth financial review before approving your application. The process is rare because it’s so expensive and time-consuming. But it’s still good to be prepared in case a financial review does come up.
You’ll actually be asked to prove the income you stated on your credit card application during this process. You’ll need tax returns and anything else to get to the number you stated. Again, this is why it’s vital to understand what can and cannot be included as part of your annual income.
What happens if your stated income isn’t deemed accurate?
So, is stating your income accurately really that big of a deal? You bet it is. Obviously, a small discrepancy isn’t going to raise any red flags. But grossly misrepresenting your income is a big problem, especially if you create false or non-existent revenue streams.
While these extreme scenarios are rare, they certainly can happen. That’s because you can potentially be convicted of fraud for lying on your credit card applications. If that occurs, you’re looking at big fines and even jail time. However, this is one of the unlikeliest of scenarios.
Lying on Your Application
Lying on your credit card application is something that can come back to bite you if you’re facing bankruptcy. If the credit card company can prove you lied on your application, the resulting debt may not be discharged as part of your bankruptcy settlement. In other words, you’ll still be required to pay what you owe on the card.
The creditor will have done their due diligence in determining that you’re able to repay any debt incurred. But if you grossly misrepresented your earnings, they couldn’t accurately make that judgment as required by the Credit Card Act.
Of course, an innocent mistake isn’t going to land you jail time or put you into bankruptcy. So do your best to estimate your income in good faith and keep proper documentation even after you’ve been approved for the card.
Those are good accounting habits to keep, anyway, so covering your bases for your next credit card application is just the icing on the cake.
Next Steps
Even with new laws governing income reporting on credit card applications, there really is a lot of leeway given. As long as you understand the technicalities involved with what income does and does not count, you should be good to go.
Furthermore, remember that credit history is a considerable component of your application. You may not be able to easily control how much you earn, but there are plenty of steps you can take to improve your credit score. A combination of both is sure to help you qualify for the card you want.
