No Job? No Credit Card

Includes: BAC, C, COF, JPM
by: Zacks Investment Research

If you are a stay-at-home parent, an unemployed spouse or a college student with low personal earnings, you may not qualify for a credit card of your own. This is what the Federal Reserve’s proposed lending rule portends.

According to a report in the Wall Street Journal, the Federal Reserve has already put into effect some aspects of the CARD (Credit Card Accountability, Responsibility and Disclosure) Act, which was signed into law by President Obama in 2009. The lending rule proposed of late, is part of Federal Reserve’s implementation process. The proposed rule primarily seeks to ensure that individuals getting credit facilities through credit cards are able to pay their bills.

Though the rules under the CARD Act were aimed at protecting credit card users from unreasonable late payment fees, interest rate hikes and other penalty fees, the proposed change could prove difficult for unemployed Americans.

What Is the Proposed Change?

In the present scenario, card issuers judge the eligibility of credit card applicants by their total household income. In case of a married couple, the income of both partners comes into consideration.

The proposed rule suggests that applicants would need to show independent income to be eligible for a credit card. However, a non-earning individual will qualify for a credit card if it is owned jointly with his/her earning partner.

Who Will Be Affected?

This could be considered as an undesirable side effect ofthe CARD Act that came into effect in August 2010. The sufferers will essentially be college students and stay-at-home parents with zero earnings. Even high household income will be of no help for citizens thus pigeonholed.

If strictly applied, the proposed rule could also affect many other Americans. Many women who earn less or nothing often require credit to start a business or leave a bad marriage. As narrow credit histories keep such women from mortgage loans, they usually depend largely on credit cards. The rule will come as rude shock for them.

On the other hand, card issuers including Citigroup Inc. (NYSE:C) Bank of America Corp. (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM) and Capital One Financial Corp. (NYSE:COF) are already facing challenges related to the CARD Act as issuing credit at a rate suited to a customer’s risk is already a complex process. A significantly lower number of eligible applicants, given the current 9.8% unemployment rate, could be a further threat to the profitability of these banks.

Will You Be Better Off?

There is no doubt that the proposed lending rule will attract serious criticism, but this was probably necessary to avoid a further credit mess.

The proposed rule would obviously have a negative impact on the willingness of customers eager to apply for store credit as acceptability could be denied at the point of sale. But card issuers will be much more secure with respect to retrieving their money. Though the lower number of cards will generate lower revenue, less payment default will offset the majority of the headwind.

Quite understandably, the proposed rule is aimed at restricting the use of credit cards without the affordability to pay bills, but many Americans who seriously need credit and have the capacity to repay will be affected by this rule. By the look of things, we can now say that though the rule requires more clarity, a conservative credit card policy will lead gradually to a better future.