How do you answer credit card applications questions such as the monthly spend, housing payment, and annual income? These seemingly straightforward requests can have hidden wrinkles that make it challenging to provide the correct response.
It is always best to provide honest, accurate answers. The truth will come out if the bank places your credit card application under review. A review means that the lender will verify your answers before making a final approval or denial decision.
Keep in mind that the information you provide supplements data obtained from your consumer report and FICO score. Your answer can make or break getting approved – and most importantly – being able to manage the new account responsibly.
Monthly Spend With Credit Cards
The monthly spending question on credit card applications has a hidden purpose that only industry insiders can explain. The bank is asking for information that provides the missing link to solve an equation that predicts future profitability.
- Approximately how much do you spend using credit cards per month helps the bank solve how much revenue you currently generate for other companies
- How much will you spend each month on this credit card help the bank forecast the amount of revenue you might produce in the future with them
Banks take the monthly credit card spending disclosed on your application to estimate future revenue from possible account approval. The issuing companies make money from two primary revenue streams.
- Interchange fees accrue each time you complete a transaction with a merchant
- Interest charges apply when you revolve the balance (pay less than the full amount owed)
The first estimate is a direct percentage of what you might charge each month, while the bank derives the second by subtracting your response from the revolving balances appearing on your consumer report. For example, this illustration shows how the bank computes projected interest income for a fictional person responding with a $1,500 monthly spending figure.
- $5,000 balance (on bureau report) – $1,500 new charges disclosed by applicant = $3,500 revolving balance carried over from the previous billing cycle which is subject to interest
- $1,500 balance (on bureau report) – $1,500 new charges disclosed by applicant = $0 revolving balance carried over from the previous billing cycle which is subject to the grace period
Banks also use the monthly spending with credit card answer to set the initial account limit. The limit is the maximum balance that you can carry on the account at any time. In general, customers paying off a more significant percentage of the balance at the end of each billing period obtain the highest limits and vice versa – setting aside your credit score, of course.
As we see from the example above, the ratio of monthly spending to ending balance tracks firmly to the percentage of the balance paid each month. The banks also obtain the limit assigned by competing banks from your consumer report. The ratio gives the new bank more in-depth insight into how you handle payment with other issuers – a key underwriting element not available directly from a consumer report.
Using the revenue estimate and credit limit examples, we can conclude that there is no best answer to the credit card spend question on many applications. In some cases, a higher number is good, while in others a lower number is better. Therefore, honesty is always the best policy here as with personal loans, and in all other avenues of life.
- Low figures can be good or bad
- Fewer interchange fees
- More interest revenue
- Lower percent paid each billing period
- High figures can be good or bad
- More interchange fees
- Less interest revenue
- Higher percent paid each billing period
Annual Income When Applying for a Credit Card
Many people do not know what annual income means when applying for a credit card, and good reason; the definition can be confusing given the number of resources consumers can tap to finance their living expenses, and the various qualifiers a bank could use in the question.
- Possible Sources
- Wages from employment, such as salary, commissions, bonuses, tips, etc.
- Alimony, child support, and other court-ordered payments
- Social Security benefits for retirement and disability
- Structured settlements from lawsuits or insurance policies (disability or annuity)
- Interest income from investments, trust funds, and savings
- Possible Qualifiers
- Gross annual income is your total earnings from all sources in a calendar year
- Net annual income is the gross figure minus deductions for taxes, insurance, 401K contributions, etc.
Banks make decisions about how much money to put at risk based on answers. Therefore, do not lie about, exaggerate, or inflate your actual income. It is unlikely that the lender will prosecute you for falsifying the application. However, you could have a black mark on your consumer report that remains for seven years if you borrow more than you can afford to repay.
What should you put down for annual income when applying for a credit card if you are a college student? This complicated question has an equally complicated answer. Therefore, pay close attention to avoid problems in the future – when the bill comes due.
- Student loans do not count as income. Loans are a debt that you must repay, and they appear on your consumer report as such. However, you can report any excess funding borrowed to pay living expenses as an asset – albeit a temporary one.
- The portion of student financial aid that does not cover coursework (tuition, textbooks, and fees) counts as income. You can include aid such as stipends, grants, scholarships, and money earned by working.
College students over the age of 21 can include “accessible income” to help qualifications (see below) for details – if their parents provide regular support meeting one of three definitions. Students under the age of 21 cannot include their parents’ income unless they cosign.
The term “accessible income” began appearing on credit card applications in 2013 after the Consumer Finance Protection Bureau (CFPB) amended Regulation Z. The new ruling allows issuing banks to consider income and assets to which applicants aged 21 years and older have a “reasonable expectation of access.”
The ruling primarily targets stay-at-home parents who do not work outside of the house. For example, “accessible income” could include any of the following earning sources funded by a non-applicant.
- Deposits into a joint account shared with the applicant
- Deposits into an account to which the applicant does not have access but regularly transfers a portion of the money to the applicant’s individual bank account
- Regularly uses a part of the non-applicants income to pay for the applicant’s expenses
Monthly Housing Payment Credit Card
Many credit card applications will ask about your monthly housing payment to determine your fixed costs and free cash flow (disposable income). Fixed costs recur monthly and consume a portion of your periodic after-tax earnings. Free cash flow is the amount left over to fund your other everyday living expenses and discretionary purchases – which you might charge to the account and then have to repay.
Banks ask the “rent, own, or other,” and related questions to help estimate your free cash flow. Approvals have more free cash flow, while denials tend to have less.
Consumers who “own” their home should include escrow in their monthly housing payment answer when applying for a credit card. The bank is asking about fixed expenses. Escrow payments add to your monthly mortgage payments and go to fund two expenses that generally remain constant.
- Property taxes that fund your local schools and municipal government
- Homeowner insurance premiums to protect the bank from losses due to hazards
Escrow payments are fixed expenses because we all must pay taxes and cover our home against fires and other sudden hazards. You cannot make behavioral changes to lower escrow costs. However, you can shop around for a cheaper policy or file a property tax dispute and win. But, these cases are rare.
Tenants who share an apartment with a roommate should report the split rent as their monthly housing payment answer. Credit card applications are asking about your fixed expenses, not the obligations of the other people sharing your home.
Most property managers and apartment leases hold the roommate personally accountable for his or her share of the monthly rental payment. It is common practice for landlords to pull a consumer report for each cotenant and then require co-signers (from parents) when needed.
Living with Parents
Young adults living in their parents’ basement should include the actual rent charged in their monthly housing payment answer when applying for a credit card. Banks are asking about real expenses. Some parents charge rent to their boomerang children, and some do not.
Give an honest answer when living with your parents. You do not want to under-report your rental obligation and then find yourself in trouble. Your response goes into the account limit calculation. Sometimes, these limits act as valuable restraints that can help first-time borrowers handle their accounts responsibly.
Consumers do not need to include utilities in their monthly housing payment response because credit card applications are not asking about variable expenses. The amount of money allocated each month to pay the gas, electric, and water bills go up and down. Also, changes in the weather and the choices you make can have a profound effect.
- Lowering the thermostat in the winter can save on natural gas bills, as does adding insulation or purchasing a high-efficiency furnace
- Opening windows and closing blinds in the summer instead of running the air conditioner cuts the electric bill, as does turning off lights, televisions, computers, etc.
- Taking shorter showers and turning off the automatic lawn sprinklers can lower your water bill