Just how important is your income when you apply for a credit card?
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Whenever you fill out an application for a new credit card, you’re going to reach a section where the credit card company asks you about your income.
This part can prompt some questions for consumers, especially those who don’t apply for cards often. You might be wondering what exactly qualifies as income and if yours is going to be enough for the credit card company to approve your application.
Since your income is an important factor during the credit card application process, it’s good to know why it comes into play and how it will affect your chances at an approval.
Why credit card companies ask for your income
Credit card companies need your income to determine how much credit, if any, to issue you. For example, one could decide that based on your income, it would issue you a card with a credit limit of $1,000, or $5,000, or $15,000.
Asking for your income is a legal requirement for credit card companies due to the Credit CARD Act of 2009. That act also requires them to only approve an application if they’re confident the applicant will be able to afford their monthly payments, but it doesn’t list any specific guidelines they must follow in terms of how much credit they can issue based on an applicant’s income.
Although your income primarily impacts the credit limit you get, it can also determine whether you’re approved for a card, because certain cards have a minimum required credit limit. That minimum is often set by the payment network of the card, such as Visa or Mastercard. How this works is a bit confusing, so it’s easiest to explain with an example.
Visa has three different levels of cards available, and each has a different minimum credit limit:
- Visa® Basic -- No minimum
- Visa® Signature -- $5,000
- Visa® Infinite -- $10,000
Take this example: You apply for a Visa® Signature card, but the credit card company is only willing to issue you $2,000 in credit. It would need to deny your application for that card, because it can’t issue the card with a limit under $5,000. Had you applied for a Visa® Basic card, the credit card company could have approved you with a $2,000 limit.
How credit card companies set your credit limit
Your income is a significant factor in determining the credit limit you can get, but it’s not the only factor. The credit card company could also consider:
- Any monthly debt payments you have
- Your rent or mortgage
- Your credit score
- Your available credit with other credit cards
Each credit card company has its own formula for how it uses this information to set your credit limit.
It’d be nice to predict the credit limit you’ll receive based on your income, especially if you’re applying for a card that has a minimum required credit limit. While this isn’t possible, in our research on credit limits, we’ve found that credit card companies generally like to keep your total credit limits with them between anywhere from 25% to 100% of your annual income.
What qualifies as income on a credit card application?
There are different standards for what counts as income depending on whether you’re at least 21 years old. If you are, then you can include any income for which you have “reasonable expectation to access.” This can include:
- Income from your job
- Income from freelancing or other types of independent work
- Your spouse’s or partner’s income
- Social Security
- Retirement fund distributions
- Trust fund distributions
- Scholarships and grants
For those under 21, you’re only allowed to include any sort of personal income you have, allowances, scholarships, and grants.
Will a credit card company verify your income?
Although a credit card company could ask you to provide income verification, this almost never happens. Instead, they’ll take your word for it and use your reported income.
Let’s address the obvious elephant in the room here: Since there’s no income verification, what happens if you exaggerate your income?
To be honest, you’re unlikely to get into any trouble solely for exaggerating your income. But it’s fraud to knowingly provide false information on a credit card application, and this could come back to bite you if you aren’t able to pay off what you charged.
If your reported income on your credit card application was much higher than your actual income, then a court could prohibit you from discharging credit card debt in bankruptcy. In some cases, offenders have even received hefty fines and/or imprisonment, as the crime carries a maximum penalty of up to $1 million in fines and 30 years in prison.
A standard part of every credit card application
You need to provide your income each time you apply for a credit card, but you shouldn’t worry too much about it. The truth is that the credit card company just wants to make sure they give you the right credit limit. You don’t need to be a big earner to get a card, as most cards are an option even for those with more modest salaries.
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