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Here's how to make credit building fair for all customers

By Odysseas Papadimitriou

For the Deseret News

Published: Friday, Dec. 28 2012 7:10 p.m. MST

FILE - In this Nov. 19, 2009 file picture stickers on a window show which credit cards are valid in a shop in Frankfurt, central Germany.

Michael Probst, File, Associated Press

Enlarge photo»

You can’t underestimate the importance of a good credit score, as our credit standing dictates the credit card and loan terms for which we qualify as well as our ability to lease a car, find housing or secure employment (especially if your career of choice requires a security clearance or the handling of money).

In other words, it’s basically a quick way for someone who doesn’t know you to gauge whether you’re responsible or not, particularly when it comes to money, in this highly populated meritocracy in which we live. That’s why an inability to build credit under your own name is more crippling than not having any Internet access in this day and age.

The problem is not everyone can build credit. Credit cards are the most common and easily accessible credit-building tools, since they relay information to your major credit reports each month, but the fact that credit card companies are now required to evaluate each applicant’s ability to pay based on their independent income and debts means that folks like stay-at-home parents are left out in the cold. This is obviously a problem that merits a solution, but what?

Regulators Suggest a Return to Household Income

The Consumer Financial Protection Bureau recently proposed one possible resolution, suggesting that we essentially revert back to the old system of allowing people to list household income on credit card applications. Only they don’t call it “household income,” instead referring to it as “third-party income to which they have a reasonable expectation of access.” Whatever you call it, this type of shared-income application rule would cause more problems than it solves, as it offers a gateway to debt, less attractive rates for all consumers and economic turbulence.

Here’s an example of what could happen under such a system. Imagine two people apply for credit cards; Applicant A lists $100,000 in income and $25,000 in debts, while Applicant B lists $25,000 in income and $25,000 in debts. Applicant A would undoubtedly appear to be a stronger candidate, but what if that $100,000 income is comprised almost entirely of $75,000 earned by their significant other? The credit card company would have no way of knowing that, would approve Applicant A while rejecting Applicant B despite their identical financial situations, and could very well end up losing money if the aforementioned $75,000 was already committed to other debt obligations.

When you think about that happening at scale, it’s clear that a lot of people would get more credit than they can afford under a shared income rule, which would cause more defaults, cost banks money, and force them to differentiate rates less for the best and worst applicants simply because they wouldn’t know which is which. We’ve all seen what can happen to the economy when interest rates are high and the major banks struggle.

Is There a Less Problematic Solution?

Instead of going back to a credit card approval system that has already proven to be ineffective, we should make progressive rule changes that satisfy the needs of hard-working folks who aren’t compensated monetarily without putting undue pressure on the economy. More specifically, we should:

Require joint applications: If every credit card issuer offered joint applications, it would be easier for stay-at-home spouses to apply together with their significant others. This is preferable to applying using household income because both parties would be required to list their own income and debt, giving credit card companies a true sense of their financial capabilities. Both parties would also build credit under their own names since both would include their Social Security numbers on the application.

Eliminate income requirements for secured cards: Simply boosting the availability of joint applications won’t completely solve the credit building problem for stay-at-home spouses, as they would still lack independence. That wouldn’t be an issue if you also enable anyone who can place the required security deposit to open a secured credit card. When you think about it, you shouldn’t have to demonstrate consistent income in order to get a secured card because the security deposit you have to place acts as your credit line and therefore naturally prevents overspending and protects issuers financially. And since secured credit cards are indistinguishable from unsecured credit cards on credit reports, all you’d need to build credit is at least $200.

At the end of the day, the importance of a good credit score and the recent economic uncertainty necessitate not simply opting for the type of quick fix advocated by the Consumer Financial Protection Bureau. There’s no reason why we should have to choose between stay-at-home moms and dads and an efficient credit card approval system because unlike someone who wants to have their cake and eat it too, everyone can win in this situation.

Odysseas Papadimitriou, a former Capital One senior director, is CEO of the credit card comparison website Card Hub as well as the new personal finance social network Wallet Hub, where you can read and write reviews on companies, products and people.

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