Why Disclose Your Income?
In 2009, the Credit Card Accountability Responsibility and Disclosure (CARD) Act was passed to protect consumers from predatory credit card practices. One provision of the CARD Act was to impose income requirements for obtaining a credit card.
No specific income level was mandated, but each individual merchant or credit card company was required to verify the applicant’s ability to meet the minimum monthly payment.
Companies may request a pay stub or W-2 form to verify annual gross and net income. Most credit card applications ask for net annual income.
Net Annual Income
When you put the words “net annual income” together, the number you enter on your credit card application is not as straightforward as it seems. Net annual income is the amount of money you earn in a year after all deductions and taxes have been taken out.
What do the parts of “net annual income” mean?
Annual: “Annual” means “per year.” On a credit card application, you report the amount of income you receive on an annual basis. If you are a salaried employee, this is straightforward. You provide the total salary amount you receive each year. If you are hourly, it becomes more complicated. Using your calculator or computer, multiply your hourly wage by the number of hours worked per week. Multiply that answer by 52 weeks in a year, and you’ll have your approximate annual salary. For example, if you earn $8.00 per hour and work 30 hours a week, you have $240. Multiply it by 52 weeks, and you arrive at $12,480. If you are self-employed, you would use the income you have dedicated for the year based on a cash or accrual accounting basis.
Net: The net is the take-home pay. This is the amount you take home and spend or deposit in the bank after all deductions made by your employer. Common deductions are federal and state taxes. Local taxes may also be deducted, which may include municipal and city taxes and possibly school taxes, depending on where you live. There are also deductions for healthcare and Social Security. You may have deductions for savings plans, including retirement savings like a 401(k). There may even be deductions for health insurance. If you are self-employed, you should deduct necessary expenses for income generation and any allowable tax deductions according to the self-employed status used.
Income: Income is one of the most critical parts of the credit card application approval process. Only your credit score is more important. Not only is income important for approval, but it’s also essential for determining your credit limit. Income is not just your salary or total hourly wages. It can include other things. You should make your income as high as legally possible on your credit card application. An amendment to the CARD Act in 2009 expanded the definition of income for credit card applicants.
Gross annual income is your income before any deductions are taken out. Credit card companies typically prefer net annual income because that is the amount you have available for monthly payments. Some companies may ask for gross annual income.
What is Considered Income?
Income definitions vary by age. For anyone aged 21 and older, income can include:
- Personal income
- Income from a spouse or partner
- Trust fund distributions
- Social Security distributions
- Pension distributions
- Scholarships and grants
- Allowance and gifts
For anyone aged 18 to 20, income can include:
- Personal income
- Allowances that can be verified through tax returns or other documents
- Grants
- Scholarships and Grants
Note: Student loans are not income. They are debt.
Some credit card companies allow the inclusion of variable income, such as military allowances. This income can fluctuate.
Income from investments in stocks and real estate is also variable. For example, dividends can increase or decrease. In the case of rental properties, you might have your property fully rented or not.
Income from oil and gas royalties, for instance, is very uncertain, but some banks allow it to be included. The same applies to income from cash royalties in areas like music or book publishing. People who work as freelancers tend to have very uncertain income, but banks often approve them.
Even stay-at-home parents can obtain a credit card if they report the joint income of their working spouse or partner.
Frequently Asked Questions (FAQs)
What can happen if I am not honest about my annual income on a credit card application?
Do not be deceived into lying about your annual net income on a credit card application. This is considered credit card fraud and can cost you up to a million dollars in fines and 30 years in prison.
Does child support count towards my annual income?
You can count child support, just as you can count alimony or spousal support. It is money that enters your household.
Is there a minimum annual income to qualify for a credit card?
There is no specific income you must meet, but the more you have, the better. The more likely you are to earn higher credit limits and other favorable terms. An important factor is that your income is stable and reliable. The CARD Act requires credit card issuers to consider your ability to make at least minimum monthly payments when extending credit to you. This includes not only looking at your income but also your assets and liabilities.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and credibility of our content.
Consumer Financial Protection Bureau. “CARD Act Report,” pages 12 and 48-49.
Consumer Financial Protection Bureau. “CFPB Amendment to the CARD Act Rule to Facilitate Credit Card Access for Stay-at-Home Spouses and Partners.”
Federal Deposit Insurance Corporation. “FDIC Law, Regulations, Related Acts.”
Consumer Financial Protection Bureau. “§ 1026.51 Ability to Repay.”
Source: https://www.thebalancemoney.com/what-does-annual-income-mean-when-applying-for-a-credit-card-4586775
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