Your Money Matters by Thomas Sottile, Esq.
An Obvious Warning: Using A Credit Card Requires The Ability To Pay
There are at least a few consumer product warning labels which double as comic relief. Beware! Steak knives are sharp; cigarette lighters burn. And yes, kids’ sneakers with wheels on the bottoms may cause serious injury.
As we see the holiday retail juggernaut closing in around us, one wonders about the need for a cautionary disclaimer: A notice reminding us that we are required to have the money at some point to pay for all those can’t-live-without material goods we are loading into our shopping carts.
But oftentimes the number which pops into mind is not the amount of money in the checking or savings account, but the dollar limit on the credit card. Yet, even that may be increased at the point of purchase with a quick cell phone call. Welcome to the slippery slope of consumer debt - the ride down is a breeze, and a lot of fun - but getting back up again is a whole other thing.
Earlier this year, the Federal Reserve Board approved an amendment to the Credit Card Accountability Responsibility and Disclosure Act of 2009. The CARD Act is intended to increase the disclosures associated with credit cards and to prevent some of the practices thought to have contributed to overuse and possible misuse of cards by consumers.
Among the provisions of the CARD Act is a requirement that credit card issuers notify consumers of changes to the annual percentage rates (APR) on their cards at least 45 days in advance. This gives consumers the opportunity to stop using the card before the rate changes. Creditors may not increase the APR on existing balances except under specific limited conditions, such as an account that is 60 days past due, or upon the expiration of a promotional rate. Billing statements must be sent at least 21 days before the next payment due date; and statements must include a disclosure of how many months it will take to repay the balance if only minimum payments are made each month.
Another notable feature of the CARD Act is its prohibition on extending credit to a consumer under the age of 21. This is unless the young consumer either demonstrates an independent means of repaying the credit, or obtains a co-signer who is age twenty-one or older and has the ability to repay the debt.
The Federal Reserve Board’s recent action is intended to enhance protections for consumers who use credit cards, and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations. For example, a credit card company which makes a promotional offer to waive or reduce an interest rate cannot revoke it unless an account becomes more than 60 days delinquent. Also, application fees and similar charges that a consumer is required to pay before an account is opened are subject to CARD Act protections as well.
Additionally, in order to guard consumers from incurring unaffordable levels of credit card debt, the CARD Act now requires that card issuers consider a consumer’s ability to make the necessary payments on the account. This vetting process take place before a consumer is able to open a new credit card account, and even prior to his/her increasing the credit limit on an existing account.
The requirement specifies that credit card applications cannot request a consumer’s “household income” because that term is too vague to allow issuers to evaluate properly the consumer’s ability to pay. Instead, issuers must consider the consumer’s individual income or salary. In other words, when a person applies for a credit card or to increase an existing line of credit, it is solely that individual’s income that is assessed and not the overall income of the household. To meet the requirements of the rule, creditors also may request supplementary information in the credit application process. This proof may include income and housing expenses (rent or mortgage amount).
The new ability-to-pay regulation has attracted a variety of critics. Prior to its taking effect in October 2011, some financial institutions and advocacy and community organizations argued that the provision had a potentially negative impact on certain groups of borrowers and their capacity to obtain credit. Among these are military personnel, retirees, and non-wage earning, stay-at-home spouses who may be incapable of showing an independent means of income. The opposition contended that in most American households, income is shared among members of who live under the same roof. Thus, it would be unfair to necessitate that each family member show an independent source of income before obtaining a credit card.
The National Consumer Law Center (NCLC), a consumer advocacy group, maintains that the person acquiring the debt should be required to confirm an ability to pay. If a stay-at-home mother incurs debt that she has no capacity to repay, and she cannot access her spouse’s income or assets, she will be in a far worse position than if she had never taken on the debt. The NCLC also suggests that cards issued at the point-of-sale, which account for a significant portion of cards provided to persons without independent income, encourage impulse buying, which might be precarious to those of limited means.
Although the implemented guidelines prohibit the granting of credit to one spouse based on the non-applicant spouse’s income, it still permits the non-income producing spouse to be a joint applicant for credit with the income producing spouse. However, there are pitfalls in this arrangement as well. In the instance of death or divorce, the non-applicant spouse might not have sufficient independent means to obtain his or her own credit cards should the joint account be closed. This would deprive the non-income-producing spouse of the ability to establish credit in his or her own name. Indeed, the consequences of severed relationships on credit availability have been expressed widely by consumers as one of the top ten negative feature of the ability-to-pay mandate.
Credit may be compared to items such as alcohol or sugar which are pleasurable in measured quantities; or prescription medicine which is necessary and beneficial to the ailing body. Nevertheless, all can be toxic if used in excess. Credit is similar — but different as well because it is an intangible item. To have it may be viewed as a right. But failure to honor the obligations it imposes carries a burdensome and possibly long-lasting financial penalty.
Is it fitting and proper for the federal government to exercise its power by excluding certain Americans from having access to credit because of their economic status? This is a question for each of us to answer.
*
Thomas Sottile is an attorney in Media, PA. He retired from the U.S. Postal Inspection Service after 23 years as an investigator and attorney.
An Obvious Warning: Using A Credit Card Requires The Ability To Pay
There are at least a few consumer product warning labels which double as comic relief. Beware! Steak knives are sharp; cigarette lighters burn. And yes, kids’ sneakers with wheels on the bottoms may cause serious injury.
As we see the holiday retail juggernaut closing in around us, one wonders about the need for a cautionary disclaimer: A notice reminding us that we are required to have the money at some point to pay for all those can’t-live-without material goods we are loading into our shopping carts.
But oftentimes the number which pops into mind is not the amount of money in the checking or savings account, but the dollar limit on the credit card. Yet, even that may be increased at the point of purchase with a quick cell phone call. Welcome to the slippery slope of consumer debt - the ride down is a breeze, and a lot of fun - but getting back up again is a whole other thing.
Earlier this year, the Federal Reserve Board approved an amendment to the Credit Card Accountability Responsibility and Disclosure Act of 2009. The CARD Act is intended to increase the disclosures associated with credit cards and to prevent some of the practices thought to have contributed to overuse and possible misuse of cards by consumers.
Among the provisions of the CARD Act is a requirement that credit card issuers notify consumers of changes to the annual percentage rates (APR) on their cards at least 45 days in advance. This gives consumers the opportunity to stop using the card before the rate changes. Creditors may not increase the APR on existing balances except under specific limited conditions, such as an account that is 60 days past due, or upon the expiration of a promotional rate. Billing statements must be sent at least 21 days before the next payment due date; and statements must include a disclosure of how many months it will take to repay the balance if only minimum payments are made each month.
Another notable feature of the CARD Act is its prohibition on extending credit to a consumer under the age of 21. This is unless the young consumer either demonstrates an independent means of repaying the credit, or obtains a co-signer who is age twenty-one or older and has the ability to repay the debt.
The Federal Reserve Board’s recent action is intended to enhance protections for consumers who use credit cards, and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations. For example, a credit card company which makes a promotional offer to waive or reduce an interest rate cannot revoke it unless an account becomes more than 60 days delinquent. Also, application fees and similar charges that a consumer is required to pay before an account is opened are subject to CARD Act protections as well.
Additionally, in order to guard consumers from incurring unaffordable levels of credit card debt, the CARD Act now requires that card issuers consider a consumer’s ability to make the necessary payments on the account. This vetting process take place before a consumer is able to open a new credit card account, and even prior to his/her increasing the credit limit on an existing account.
The requirement specifies that credit card applications cannot request a consumer’s “household income” because that term is too vague to allow issuers to evaluate properly the consumer’s ability to pay. Instead, issuers must consider the consumer’s individual income or salary. In other words, when a person applies for a credit card or to increase an existing line of credit, it is solely that individual’s income that is assessed and not the overall income of the household. To meet the requirements of the rule, creditors also may request supplementary information in the credit application process. This proof may include income and housing expenses (rent or mortgage amount).
The new ability-to-pay regulation has attracted a variety of critics. Prior to its taking effect in October 2011, some financial institutions and advocacy and community organizations argued that the provision had a potentially negative impact on certain groups of borrowers and their capacity to obtain credit. Among these are military personnel, retirees, and non-wage earning, stay-at-home spouses who may be incapable of showing an independent means of income. The opposition contended that in most American households, income is shared among members of who live under the same roof. Thus, it would be unfair to necessitate that each family member show an independent source of income before obtaining a credit card.
The National Consumer Law Center (NCLC), a consumer advocacy group, maintains that the person acquiring the debt should be required to confirm an ability to pay. If a stay-at-home mother incurs debt that she has no capacity to repay, and she cannot access her spouse’s income or assets, she will be in a far worse position than if she had never taken on the debt. The NCLC also suggests that cards issued at the point-of-sale, which account for a significant portion of cards provided to persons without independent income, encourage impulse buying, which might be precarious to those of limited means.
Although the implemented guidelines prohibit the granting of credit to one spouse based on the non-applicant spouse’s income, it still permits the non-income producing spouse to be a joint applicant for credit with the income producing spouse. However, there are pitfalls in this arrangement as well. In the instance of death or divorce, the non-applicant spouse might not have sufficient independent means to obtain his or her own credit cards should the joint account be closed. This would deprive the non-income-producing spouse of the ability to establish credit in his or her own name. Indeed, the consequences of severed relationships on credit availability have been expressed widely by consumers as one of the top ten negative feature of the ability-to-pay mandate.
Credit may be compared to items such as alcohol or sugar which are pleasurable in measured quantities; or prescription medicine which is necessary and beneficial to the ailing body. Nevertheless, all can be toxic if used in excess. Credit is similar — but different as well because it is an intangible item. To have it may be viewed as a right. But failure to honor the obligations it imposes carries a burdensome and possibly long-lasting financial penalty.
Is it fitting and proper for the federal government to exercise its power by excluding certain Americans from having access to credit because of their economic status? This is a question for each of us to answer.
*
Thomas Sottile is an attorney in Media, PA. He retired from the U.S. Postal Inspection Service after 23 years as an investigator and attorney.
