Recently, a friend told me a troubling story about a guy she knows. He wanted a credit line increase from his bank, so he decided to inflate his income when he put in his request, giving himself a high six-figure salary.
Why would anyone be tempted to lie on a credit application? Easy: the higher your income, the more likely you are to get approved for more credit. By law, banks have to determine whether customers can afford to take on a certain amount of debt. To do this, they ask basic questions to find out how much you earn, where you work and how much your housing expenses cost per month. And, of course, they take your credit score into account as well.
The bank (I don’t know which one) apparently bought this guy’s fib and awarded him the credit limit increase he wanted. But he and everyone else should know that when you lie on a credit application, you are committing loan application fraud, a crime that can lead to jail time and/or major fines if you’re caught.
But that’s a pretty big “if.” It would take a ton of time, energy and cash for banks to verify the income, housing costs and and employment of every credit applicant. They devote that kind of time — poring your over tax records, pay stubs and bank statements — to larger loans, like mortgages, because they have more at stake. The average U.S. household carries about $15,000 in credit debt compared to $130,000 in mortgage debt.
“For credit cards, most of the time the bank will take the applicant's word for their income or they'll use some other method such as income prediction modeling,” says credit expert John Ulzheimer. “The only time a bank will want ironclad proof of income is if the applicant wants some extremely large credit line or they're buying a house.”
You’d have to give banks a compelling reason for them to go poking around your credit application. A good way to trigger those alarm bells is to fall behind on payments. They’ll definitely want to know why you were approved for such a high limit. In another scenario, let’s say you max out your credit cards, can’t afford the payments, and want to file bankruptcy to have the debts discharged. If the bank can prove you lied about your income in order to obtain that credit, you can’t discharge it.
“If the bank figures this out, all they'd need to do is contact the authorities and then [you’re] toast,” Ulzheimer says.
None of this knowledge should encourage you to lie on your credit card application. Jail time aside, banks give you credit limits for a reason: so you won’t bite off more than you can chew. You could also be putting your credit at risk. Credit scoring agencies pay close attention to how much available credit you use on a monthly basis. You should always aim to carry less than 30% of our available limit at a time (that’s $3,000 on a $10,000 limit card).