Fed Rules Promote Accurate Underwriting, Not Gender Inequity

by Odysseas Papadimitriou on March 2, 2011

HouseholdThere has recently been a great deal of talk about rules proposed by the Federal Reserve that seek to require credit card companies to consider the merits of applicants based on individual rather than household income. These rules, critics contend, stand to significantly affect stay-at-home mothers by preventing them from establishing credit history in their own names, which would be extremely important to garnering a loan, renting or buying a property, and/or landing a job in the case of divorce or the death of a spouse.

Given that 2010 Census figures show men to be the sole breadwinners in 28.2% of couples with children under the age of 18 and women to be the only earners in about 4% of such families, roughly 7.3 million women and 963,000 men would face a difficult time garnering access to credit if the claims made by the rules’ detractors prove to have merit.

Under the current system, assets and income are considered in terms of total household figures, meaning that both parties in a two-parent household are regarded as having the same assets/income, even if only one of them works. However, liabilities and debt are considered individually, making it difficult to determine who can afford additional debt, which is essentially what credit is, and who would be overleveraged by it.

Imagine, for example, a family with a stay-at-home mother whose husband is the primary income earner, making $100k a year. On paper, both people have $100k in income. The husband also has a significant amount of debt because he recently started a new business. The wife has no debt because she has long since paid down her college loans. When they each apply for individual credit cards, the husband gets declined because his disposable income (income-monthly obligations) is low while the wife gets approved because her disposable income is perceived to be high. See the problem here? You cannot claim they share the same income without also saying they share the same debt.

As a result, a system that compares apples to apples is needed. If assets and income are to be considered on a per-household basis, so too should be liabilities and debt. Likewise, if assets/income are considered individually, liabilities/debt should be as well. This is what the Fed rules propose.

The answer to the legitimate question of how married individuals without income are to establish credit history is thus not to shoot down the Fed’s proposed rules, but to instead support them while also moving to establish the ability for couples to apply for joint credit card accounts that require both parties’ Social Security Numbers (SSNs), thereby reflecting both of their incomes and debts. In addition, secured credit cards must continue to offer guaranteed approval so that as long as you have at least $200 to place a refundable security deposit, you’ll be able to open a credit card and build credit history, whether you have a steady income or not.

Therefore, while opponents of the Fed’s proposed rules do have valid concerns, they should result in the rules being supplemented, not torpedoed.

[Disclosure: Some of the links within this article point to CardHub.com, which is owned by the same parent company as Wallet Blog.]

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