The CARD Act requires that lenders now take steps to ensure that their applicants have some sort of ability to pay their debt obligations. The fact that it took a Federal law to accomplish this is a head-scratcher for sure. The question is, how are lenders doing this and how are they navigating around and through the requirement?

First off, your credit reports don’t contain your salary, so that’s a dead end. Second, your credit risk scores are not designed to predict capacity to pay, but are rather designed to predict the likelihood of you paying so that’s a dead end too. And lastly, trusting what you put on your credit application as “income” has proven to be unreliable, so that’s not really an option either.

This is certainly a capacity conundrum. And, since the world of credit is not without humor, I gladly bring you CARD Act loophole number 73: Student loans and the “no cards for those under 21” rule. A student loan is a real loan with strange terms. It’s issued by a bank and is sometimes federally guaranteed. The monies are generally disbursed quarterly or each semester to coincide with the school’s preferred method of slicing up the school year. The loans are meant to go toward funding tuition and college related costs.

What allows student loans to become a loophole to the CARD Act capacity to pay provision is the fact that most student loans are paid to the student rather than to the school directly. Then the student uses it to pay for tuition and books and other school expenses, or at least that’s the plan. I know people who used their student loans for expenses that would never be confused with scholastic expenses.

And if what we’re hearing is true, credit card issuers are considering student loans to be income rather than a liability. It seems to make sense to do so considering there is no immediate obligation to pay back a student loan, and by the time the loan enters the payback period the student will likely be employed. But still, if 100% of the loan is meant to be paid to the school, how can it be income?

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

The CARD Act requires that lenders now take steps to ensure that their applicants have some sort of ability to pay their debt obligations. The fact that it took a Federal law to accomplish this is a head-scratcher for sure. The question is, how are lenders doing this and how are they navigating around and through the requirement?

First off, your credit reports don’t contain your salary, so that’s a dead end. Second, your credit risk scores are not designed to predict capacity to pay, but are rather designed to predict the likelihood of you paying so that’s a dead end too. And lastly, trusting what you put on your credit application as “income” has proven to be unreliable, so that’s not really an option either.

This is certainly a capacity conundrum. And, since the world of credit is not without humor, I gladly bring you CARD Act loophole number 73: Student loans and the “no cards for those under 21” rule. A student loan is a real loan with strange terms. It’s issued by a bank and is sometimes federally guaranteed. The monies are generally disbursed quarterly or each semester to coincide with the school’s preferred method of slicing up the school year. The loans are meant to go toward funding tuition and college related costs.

What allows student loans to become a loophole to the CARD Act capacity to pay provision is the fact that most student loans are paid to the student rather than to the school directly. Then the student uses it to pay for tuition and books and other school expenses, or at least that’s the plan. I know people who used their student loans for expenses that would never be confused with scholastic expenses.

And if what we’re hearing is true, credit card issuers are considering student loans to be income rather than a liability. It seems to make sense to do so considering there is no immediate obligation to pay back a student loan, and by the time the loan enters the payback period the student will likely be employed. But still, if 100% of the loan is meant to be paid to the school, how can it be income?

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Watch your mailbox. You could be getting applications for small business credit cards – even if you aren’t a business owner. A recent Wall Street Journal article points out that card issuers appear to be increasing their marketing of business cards – even to consumers who work for someone else. Sometimes camouflaged in vague terms like “professional” cards, these cards come with a serious disadvantage for the cardholder:

That means issuers can raise rates with little advance notice (and apply them retroactively), charge higher penalty fees, play with floating due dates, and do all those fun things they used to do with consumer credit cards before those tactics were outlawed. 

So why on earth would anyone want a small business credit card? Believe it or not, there are a few good reasons:

Business Card Pros:

Protect your personal credit scores. With the notable exception of Capital One, which has chosen to report business card activity on personal credit reports, most business credit cards aren't reported on personal credit reports unless you default. That means if your business can't afford to pay the bill in full each month, the fact that you are carrying a balance won't weigh down your personal credit scores. (Speaking of credit scores, you should expect to see an inquiry on at least one of your personal credit reports, since most of these cards require a personal credit check.)

Separate your business and personal finances: If you actually do own a business, keeping your business and personal purchases separate can be crucial for tax purposes. Having a dedicated business card makes this easier, though another alternative would be to use a personal card strictly for business purchases. Again, though, the activity on a personal card affects your personal credit scores, for better or for worse. 

Rich rewards:  You may find richer rewards on some small business credit cards. American Express, for example, is well known for both catering to small businesses, as well as offering solid rewards. The CitiBusiness AAdvantage Visa card gives 30,000 AAdvantage bonus miles if you make $750 in purchases the first four months. That's not hard to do if you are funding a new business.

Business Card Cons

Open yourself to the old tricks and traps. You can read our Consumer Guide to the Credit CARD Act here if you want more details about the practices that Congress banned on consumer cards. But I'll say it again: The CARD Act does not apply to business accounts. And that includes cards marketed to non-business owners as “professional” cards – at least for the time being. (I can see the new Consumer Financial Protection Bureau having fun with this one.)

Note: Bank of America has stated they will extend many of the Credit CARD Act provisions to their business cards. A Capital One spokesperson is quoted in the WSJ article as saying that Capital One has applied many CARD Act protections to its business cards, but when I look at their web site, their card offers still list penalty fees that are now illegal on consumer cards.

We've said it before and we'll say it again. Just because the CARD Act protections are in place doesn't mean we can rest easy. There are still plenty of traps to watch out for.

 

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of a new ebook, Business Credit Success: Get on the Financing Fast Track.