Once you’ve sat down at your computer to fill out a credit card application, hitting send can feel like you’re transmitting your information into a black hole. Did you fill it out correctly? Will you be approved?
Credit card companies may not detail the specific requirements for card approval, but certain factors are always considered. One of those is income, and you might be reporting yours incorrectly. Here’s how your income plays into whether you’re approved for a credit card and how to report it.
Top Factors Considered on Your Credit Card Application
Different credit cards have different eligibility requirements. However, most credit card applications will take into consideration the following:
Credit score: One of the major factors in your credit card application is your credit score. Because charging purchases to a credit card is essentially like taking out a loan, creditors review your credit score to gauge how risky of a borrower you are. The lower your score, the higher the chance that you’ll miss payments; the higher your score, the more likely it is you’ll manage your card responsibly.
In many cases, you need good credit to be approved for a credit card, which is usually defined as a credit score of 700 or higher, according to Jeff Campbell, founder of the personal finance and lifestyle blog Middle Class Dad. However, there are plenty of cards on the market that accept applicants with fair credit scores of 600 and up.
[Read: The Best Credit Cards for People with Fair Credit.]
Income: Your income also plays a major role in getting approved for a credit card. Thanks to the Credit Card Accountability Responsibility and Disclosure Act of 2009, more commonly known as the CARD Act, several protections were put in place to keep consumers from falling prey to predatory credit card practices. One of those provisions was instituting income requirements to get a credit card.
Though the CARD Act doesn’t state any specific minimum income requirement, credit card companies do have to ensure applicants have enough income to support monthly payments before they can be approved for a card. Also, the creditor may ask for a pay stub or W-2 so it can verify both your gross and net income, according to Campbell. “Ultimately, it’s the net that really matters to [the creditor], as that’s the cash available to repay them,” he says.
Creditors may also look at other factors, like your housing status, as part of the approval process. Keep in mind, though, there’s not always a simple formula for getting approved by a major credit card issuer, says Jeanne Kelly, credit expert, author, speaker and owner of credit coaching company The Kelly Group Coaching Inc.
For example, you can have a good credit score but only have one loan or card to your name. “That might get you declined for not having enough credit yet,” Kelly says.
You could also have a high income but still not get approved for a credit card. It depends on how much debt you already have.
How Much Income Do You Need for a Credit Card?
So how exactly does a card issuer determine whether you earn enough income? Often, it comes down to your debt-to-income ratio, or DTI.
Your DTI, which is expressed as a percentage, measures how much of your gross monthly income is allocated toward debt repayment. For example, say you earn $48,000 a year, which breaks down to $4,000 a month. You have a student loan payment of $600 per month, plus a car payment of $350 per month. That means your total monthly debt obligation is $950. Here’s how the DTI formula would work out:
Debt ($950) / Income ($4,000) = about 24 percent DTI
A DTI of 43 percent is usually the highest that lenders will allow in order to qualify for a mortgage, though there’s no specific cutoff for credit card approval. Even so, it’s a good idea to maintain as low a DTI as possible, with less than 36 percent being the standard recommendation.
So you can see, it’s not just your income that matters when applying for a credit card. It’s also how much of that income goes to debt repayment. Two people can earn the same income, but one might be approved for a card while the other is not, based on their respective DTIs.
[Read: The Best Student Credit Cards of 2018.]
How to Report Your Income on a Credit Card Application
When it comes to your credit card application, there are several types of income you can include besides money from your regular 9-to-5. In fact, the Consumer Financial Protection Bureau amended CARD Act regulations in 2013 so that applicants age 21 and older could include third-party income, such as a partner or spouse’s income, as long as they have “a reasonable expectation of access to it.” Included in that broad definition is:
— Personal income
— Scholarships and grants
— Allowances and gifts
— Trust fund distributions
— Retirement fund distributions
— Social Security benefits
Don’t forget, if you choose to include these various sources of income on your application, you’re saying that you are able to use this money to pay back your debt. Don’t include income that you don’t have full access to or don’t plan on tapping if necessary.
If You’re Younger Than 21
Credit card applicants age 18 to 20 are subject to slightly different income requirements. They’re not able to include most third-party income, such as that from a partner, and can only include personal income as well as scholarships and grants.
What Doesn’t Count as Income?
Even though credit card issuers allow a wide variety of funds to be considered income, not all sources of money can be included.
For instance, you can’t count loan disbursements. Money you receive by taking out a loan, such as a student loan or personal loan, is technically not income since it has to be paid back. Even if you use your loan money to pay for living expenses, in the eyes of creditors, it’s not considered income.
Also, the wages or salaries of your parents are not allowed to be included as income. Unlike spouses or partners, in which case it’s reasonably expected that you would have access to their income, it’s assumed that you wouldn’t have the same kind of access to income earned by your parents.
What Happens If I Report the Wrong Income?
When it comes to reporting your income on a credit card application, it’s not expected that you get it perfect. Don’t stress about getting it right down to the last dollar. It’s meant to be an estimate, even if that estimate is expected to be pretty accurate.
It might be tempting to fudge the numbers and make it look like you earn more income so you can get approved for the card. That’s not a great idea: If you’re caught lying on an application, you could be charged with credit card fraud and face up to $1 million in fines and/or 30 years in prison.
Most importantly, however, remember that income requirements are in place for your protection. If you are approved for a card that you really can’t afford, you could end up in a pile of debt. So, be honest on your application.
[Read: The Best Starter Cards for Building Your Credit.]
If you can’t get approved, consider setting your sights on a different card. “Each bank will operate a little differently in their credit approval process,” says Campbell, noting that just because you’re turned down for one card doesn’t mean you’ll be denied for all. “However, each application generates a credit inquiry, which can have a negative, but temporary, impact on the credit score,” he says.
Alternatively, Kelly says, “You can always prequalify for a card.” This is when the creditor does a soft pull of your credit, which doesn’t affect your credit score, to see if you meet certain requirements for approval. It’s not a guarantee that you’d be approved, and you’d still have to submit a formal application, resulting in a credit inquiry, to get the card. Still, it’s a good way to gauge whether there are options available based on your credit and income.
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