No Job, No Credit

Megan McArdle Jan 4 2011, 10:59 AM ET

Last year, with much fanfare, we were told that new financial regulations would make it harder for credit card companies to suck in innocent college students with their malicious wares. This year, as the regulations actually go into effect, we're finding out that this has had an unwanted side effect. It turns out that college students aren't the only ones with high household incomes, but low personal earnings. Stay-at-home Moms also fit that description, and from now on, they're going to have a hell of a tough time getting credit in their own name:

Dress Barn Inc., Home Depot Inc., Citigroup Inc. and other companies are urging the Federal Reserve to drop a proposed rule that would require credit-card issuers to consider only a borrower's "independent" income rather than household income. The new standard, which would apply to new credit-card accounts and requests to increase limits on existing accounts, could make it difficult for some customers to get credit on the spot, especially stay-at-home moms.
Anne Fortney, a lawyer at Hudson Cook LLP in Washington, said the Fed proposal would be a setback for women's rights.

"It is astonishing that people have forgotten how difficult it was 40 years ago, particularly for women, to establish credit," said Ms. Fortney, who represents banks and retailers on consumer-finance issues. "This would really take a lot of women back to where they were in the early 1970s."

In fact, if the rules are strictly applied, they're going to impact a lot more than just stay-at-home Moms. Most women still earn less than their husbands, meaning that they're going to end up with less ability to secure credit in their own name than their husbands have. That translates into less economic power to, say, open a business using her credit, or leave a bad marriage, because you might not be able to get a mortgage on your own with only a limited credit history. Presumably, more women are going to end up as joint-account holders with their husbands, rather than limiting themselves to the piddly amount of credit they can secure under their own names.

All of which goes to show how hard it is to craft legal rules that will produce even a relatively well-defined outcome. We know what the framers of this legislation wanted: they wanted to prevent credit card companies from targeting relatively affluent kids . . . kids like, say, their kids . . . who might take those credit cards and get themselves into trouble running up bills they couldn't pay. But how do you actually do that? Credit card issuers need a solid rule, not a vaguely worded admonition not to let affluent kids get into too much trouble with their first Amex.

You can't just make it illegal to give credit cards to college kids--there are a lot of college kids who work full time and pay their own way. Nor can you simply target an age range, since there are a fair number of self-supporting twenty-year-olds out there who would be justly outraged at being denied credit. So instead, they targeted income--and accidentally denied credit to the housewives.

Of course, there's probably room for interpretation in the rules. I'd guess that by the time regulatory review is done, they will be interpreted so as to allow non-working spouses to get credit cards using marital income. But I'd also guess that this will involve substantially weakening the restrictions on credit for college kids.