Stating your income on credit card applications is a piece of cake when you earn an annual salary.
But what if you’re a student working part time, a self-employed business owner, or a stay-at-home parent? Reporting your income may be a bit more complicated if you have a fluctuating income. Even so, if the income you put down is inaccurate, you could run into issues down the road.
Read on to learn what you can count as income on credit card applications and how to calculate it correctly.
What counts as income on credit card applications?
According to the Credit CARD Act of 2009, credit card issuers can approve applications only after “the card issuer considers the ability of the consumer to make the required payments under the terms of such account.”
In other words, credit card companies now have minimum income requirements for consumers looking to get a credit card.
“Credit card issuers generally rely on income information provided by the applicant as a key component in determining the applicant’s ability to pay,” said Jim Panzarino, executive vice president and president of credit and card operations at Discover.
But the CARD Act doesn’t spell out exactly what applicants can include as income. So, in 2013, the Consumer Financial Protection Bureau (CFPB) amended the act to offer more detail.
Specifically, applicants who are 21 and older can claim any income to which they have reasonable access. The amendment also explicitly states that stay-at-home spouses or partners can count a working spouse’s income on an application.
But the “reasonable access” definition may also extend to the following:
- Personal income
- Allowances and gifts
- Scholarships and grants
- Trust fund distributions
- Retirement income
- Social Security income
The amendment doesn’t provide any changes for applicants under 21. If you’re in this camp, you can report only independent income, which may include:
- Personal income
- Scholarships and grants
If you’re wondering whether something counts as income, ask yourself the following question: Can I provide documentation if the credit card issuer requests it? For example, you can use tax returns, bank statements, pay stubs, and school records as proof of income.
What can’t I count as income on my credit card application?
“Loan disbursements are not to be considered as income,” said Panzarino. That includes student loans.
This distinction can be confusing to some students. After all, they can use student loans to pay for living expenses, essentially treating them like income. But for credit purposes, it’s a no-no to count them as such.
That’s because, like the credit card you’re applying for, a loan is a debt you must repay. On the other hand, you do not repay income after you receive it.
You also can’t count income to which you don’t have reasonable access. For example, students can’t count their parents’ income because it’s not reasonable to assume students have access to their parents’ full salaries.
How to calculate your annual income for credit card application purposes
If you have a set annual salary, calculating your income is simple. Things can get more complicated, though, if your income is irregular or you’re paid hourly.
If you’re an hourly-wage employee, use last year’s W-2 tax form to report your income. But if you didn’t work the full year or you’ve received a raise recently, use the following calculation:
Hourly wage x Average hours per week x 52 weeks = Annual income
For example, say you earn $15 per hour and work 35 hours per week on average. Your calculation would look like this:
$15 per hour x 35 hours x 52 weeks = $27,300 per year
However, if you’re self-employed or a seasonal worker and have irregular income, calculating your annual income can be more difficult.
For self-employed applicants, a good rule of thumb is to take the average of your income from the last two years. If you haven’t been self-employed for at least two years, you’ll need to estimate your annual income.
The same goes for seasonal employees. With no guaranteed amount, estimating is your best bet. There aren’t any legal guidelines when it comes to estimating your income, so you’ll want to estimate as accurately as possible.
Don’t lie about your income on your credit card application
If you’re having a hard time estimating or calculating your income, it may seem simpler to throw out a number. You may also consider inflating your income to get a higher credit limit. Doing so deliberately, however, can be credit fraud.
“Some [credit card issuers] may request that the applicant confirm or verify the income stated in an application,” said Panzarino. And if the credit card issuer finds out you deliberately inflated your income, it could file credit fraud charges.
For example, in one New York case, a man was sentenced to time served and five years’ supervised release and received a hefty fine for providing inflated income information on credit card applications.
Reporting correct income gets you credit you can handle
Stating your income properly isn’t just important to avoid credit fraud. It’s also essential to make sure you get the maximum credit limit for which you qualify. In other words, if you underestimate your income, you may get stuck with less spending power.
Before you submit a credit card application, be sure to do the math to get your income right. Then, keep that number in mind for the next time you apply.
And if you have allowable, non-independent income to report on your credit card application, make sure you can verify it before adding it in.
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