If you have a job with a fixed annual salary, reporting your income on credit card applications is easy. But for millions of students, stay-at-home parents, hourly-wage workers and freelancers, reporting annual income is much trickier.
You want to tell the truth, but the applications rarely make it clear how you should calculate such a number. What’s an honest consumer to do?
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What counts as income
Before the Credit Card Act of 2009, it seemed as though everyone with a pulse could get a big credit line. Today, that’s no longer the case. The Card Act requires lenders to extend credit only when they believe the borrower has the ability to repay it. The income you report on your credit card application is one way creditors decide how much credit they should extend to you, if any.
For those age 21 and older
According to an amendment to the Card Act, borrowers over 21 can list any income to which they have “reasonable expectation of access.” This broad definition includes:
Income from a spouse or partner.
Trust fund distributions.
Retirement fund distributions.
Have a kid in college? See how you can help them:
For those under 21
Borrowers ages 18-20 can report only independent income, which typically includes:
Personal income, including regular allowances.
Right now, there are no specific legal guidelines about how irregular income should be calculated. But generally, you should report only income that can be verified by tax returns, a letter or some other document.
“Use common sense,” says Ira Rheingold, executive director of the National Association of Consumer Advocates. “If you can’t prove the income exists, you shouldn’t list it.”
Remember, when your issuer assigns you a credit limit based on your income, it’s not a trust fall. If you default, your creditor won’t be there to catch you; it’ll be asking for its money back.
What doesn’t count as income
It’s not a good idea to state borrowed money, including student loans, as income. Although there’s no specific law against it, such reporting would go against the spirit and intent of the “ability to pay” clause in the Card Act, Rheingold says, and could hurt your finances.
“It’s debt, it’s not income,” he says of borrowed money. “In my mind, it’s a really bad idea, bordering on the absurd.”
When the loans come due, paying back the balances on your cards could prove difficult.
When issuers check your income
Most card issuers use a consumer’s stated income on applications when issuing a card. But in some cases, your creditor may ask to you to verify your income or use an income modeling algorithm to estimate your earnings, explains Natalie Daukas, a senior product manager at Experian.
Income modeling algorithms, produced by credit bureaus, estimate your income based on your credit report information. Creditors typically use these to double-check stated incomes or determine credit line increases on existing accounts, Daukas says. For credit card companies, these estimations are an easy way to quickly assess a borrower’s financial standing, without requesting access to tax documents and other verification.
If you’re spending a lot or applying for several cards within a short time, some creditors will run what’s called a financial review to verify your income. Such reviews are expensive for creditors to conduct, though, and tend to be rare.
During such a review, you may be asked to provide tax returns and other documents to verify your income. If you can’t provide proof of your reported income, the creditor may lower your credit limits or close your accounts.
What happens if your estimated income is off
Estimating your annual income in good faith and coming up short is completely understandable. Inventing self-employment income, grossly inflating your actual income or listing a nonexistent employer, though, is a different matter entirely.
If a creditor can prove in court that you committed fraud when applying for a certain card, it could make that debt unable to be discharged in a bankruptcy proceeding, says Scott Maurer, an associate clinical professor of consumer law at Santa Clara University. On very rare occasions, people have also been convicted of fraud for lying about their income on credit card applications, resulting in steep fines and jail time.
But if you’ve reported your income to the best of your knowledge, don’t worry about this.
“Proving fraud is not easy, and a consumer who truthfully lists monthly income that happens to be irregular is not going to come close to losing such a suit,” Maurer says.
The bottom line
Listing all the income you have access to can help you secure a higher credit line and therefore more spending power. But it doesn’t mean you’re immune from overspending. Borrow sparingly, try to avoid carrying a balance and readjust your budget if you face an unexpected income change, such as a job loss or a pay cut.
Your creditor will do only so much to prevent you from defaulting, based on your stated income. The rest is up to you.