For the past year, non-working spouses have found themselves in a difficult credit position: as of October 1, 2011, they were no longer able to qualify for credit based on their household income. This change came about because of the 2009 Credit CARD Act, which was attempting to fix problems in the credit industry. Unfortunately, sometimes forward progress in one arena takes you backward in another.
This legislation was passed in order “to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes.”
The noble goal of this act was to reduce predatory lending practices and to ensure that vulnerable borrowers—such as minor college students—could not be targeted for promotional and marketing schemes. In addition, the law hoped to make it possible for borrowers to actually dig themselves out of debt while only paying the minimum each month. Finally, the law changed the requirements for credit-worthiness: now, an individual cannot use household income when applying for a credit card, but only his or her own individual income.
Unintended Consequences Limit Credit Availability
The upshot of this portion of the law—which was written to make sure that college students and other non-working individuals cannot get themselves into credit card trouble—is that stay-at-home-parents can no longer apply for their own credit cards without their working spouse co-signing for it. This also means that these stay-at-home-spouses cannot establish or build their own credit.
This is a fairly serious unintended consequence of a well-intentioned law. Not only will it be difficult for young stay-at-home-mothers who have not already established their credit history to become credit-worthy, but it also has fairly serious ethical implications for battered spouses. Access to credit is an important tool for victims of spousal abuse to find a way to escape. Finally, the end of a marriage through separation, divorce, or death could be financially devastating to the stay-at-home-spouse who not only has to enter the work force after many years away, but also has no credit history established.
The website MomsRising started a petition to ask the Fed to rethink this particular policy. According to The Credit Union Times, the petition got the attention of Richard Cordray, the Director of the Consumer Financial Protection Bureau, who has stated that he is committed to finding a solution to this thorny problem.
While the implications may be somewhat alarming when you consider that the Fed has determined that working as a stay-at-home-parent is financially worthless, the situation is not completely dire for many SAHMs and SAHDs. The ruling is not retroactive, so any credit a non-working individual had in his or her own name prior to the law will not be taken away. This allows non-working spouses to continue to build credit.
In addition, any income that a stay-at-home-parent brings in can be considered for credit-worthiness. The law does not specify how much income you must have—only that you have the ability to make payments. So if you do any kind of freelancing, babysitting, or teaching, or you own a small home business, then you can still qualify for credit—although your credit limit will be affected by the amount of money you bring in.
Ultimately, access to credit is something that should be regulated so as to keep irresponsible borrowers from getting themselves in trouble. However, the new law has made it seem as though all parents who decide to stay home with their kids would be irresponsible with credit. While legislating such nuanced issues is very difficult, there does need to be room for spouses who do the work of parenting and care giving to be able to also have independent credit. Clearly, the Fed has a difficult issue on its hands.