Monday, February 7, 2011

No Job No Credit

For the most part I write this post about the effect of financial reform on mortgage and real estate markets.  But today I saw a topic that is just too good to pass up--the Federal Reserve's new proposed rule on credit cards which will require individual applicants to prove that they have sufficient income to repay the debt rather than qualifying against household income.  The proposed new rules are supposed to protect college students and young adults from acquiring credit cards and incurring debt that they cannot afford to repay.  The theory is that these young people run up huge debt and ruin their financial futures and credit history before they are even really ready to start their lives as independent adults.  But the unintended consequence of the proposed rule is that it will make it impossible for stay at home mothers to obtain credit in their own names without their husbands as co-signers.

To me this is fascinating.  My mother was a stay at home mother for over 25 years.   She was joint on a couple of my dad's credit cards, but her use of credit was limited.  Since my mother does not like debt and does not approve of much credit usage, I can never remember this working a particular hardship on her.  Financially, she was more conservative than my father in her attitudes about debt and credit.  After her children graduated from school, she went to work and she has her credit in her own name but she remains a fiscally very conservative person.

So what is the issue with the income verification aspect of the new credit card rules?  The rules are being issued in response to changes called for in the CARD act passed in 2009, but some proponents of the credit card reforms, including Representative Carolyn Maloney (D-NY) fear that the restrictive new rules will make it harder for women to get credit and that the rules will inadvertently trap women in abusive marriages since employers and landlords check credit histories. 

Just to be clear, I am not a fan of any of the new financial regulation.  I have watched access to credit become increasingly more restricted and more expensive.  However, to argue that new credit card rules will trap women in abusive relationships is absurd.  Honestly, how many women with no income of their own living in abusive relationships with violent controlling men are out running up debt their husbands/significant others don't know about? (If they are, they probably shouldn't be.)  Not having a credit history at all does not necessarily mean that a woman will not be able to rent an apartment or get a job.  And credit agencies are utilizing alternative credit more and more so someone trying to make a fresh start on her own may be able to use the fact that her name is on the utility bills and the current apartment lease to provide some credit history. 

No credit history is always preferable to bad credit history.  If only one person is a wage earner in the household, he or she probably needs to be consulted before the other spouse acquires new debt.  Otherwise, the family as a unit is undoubtedly going to have a difficult time setting realistic budgets and sticking to the family's financial plan.

However, if advocacy groups really believe that the proposed rules are truly discriminatory against women and will return us to the 1950s when a married woman could not get credit without her husband's permission, this would be easy to solve.  Since the rules are supposed to primarily protect those under 21, why not write a minimum age into the law?  As a society, we do not allow people to drink under a certain age, to rent cars under a certain age, or to marry without permission of their parents under a certain age.  What is wrong with saying that no person under the age of 25 can apply for credit without proving that they individually have enough income to cover the obligation?  This would protect women who have successfully maintained a credit history for many years but do not have income at the moment because they are at home with their children, and it would also protect younger adults from incurring debts they can't pay.

Retailers are also unhappy about the new rules since businesses that cater primarily to women, such as bridal shops and department stores, will not be able to issue credit cards at the point of sale and many fewer women will apply for credit since they will not want to face the potential embarrassment of being denied or told that they need a co-signer.  And that is probably the real issue. Consumers spend more on credit than they do in cash, so retailers really count on issuing credit to make large purchases even larger and more palatable for the consumer.  A woman without her own income who is not living with an abusive, mean spirited man is probably not going to want to ask her even-tempered mate for permission to spend thousands on credit, but if she can just get the credit card without asking anybody, she will probably do so.

The irony of this whole debate is that the proponents and opponents of the proposed rules are focused on whether the rules give husbands too much control over their wives, but not whether the rules give the federal government too much control over everybody.  Since when did it become the government's business to tell us what we can be allowed to buy and borrow?  With no fault divorce, even the most brow beaten woman can eventually be free of a really controlling husband, but there is no divorce from Uncle Sam.

Retailers and credit card companies take a risk when they issue credit to any individual--whether that individual is working or not.  Likewise, when any of us as a consumer completes an application for a credit card, we are also taking a risk.  We are gambling that we will be able to pay that money back; the credit card company is gambling that we will be both able and willing to do so.  At the end of the day, the decision to issue credit, and the decision to accept or reject the credit offers, should be between the individual and the credit issuer.  The federal government should not be involved at all.

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