Should Retailers Verify Customer Income Before Extending Credit?

One provision of the CARD Act requires credit issuers to verify income and debt load before issuing new credit, and the Federal Reserve is now looking at how to enforce that. That’s scaring retailers, who have come to enjoy the benefits of pushing “instant credit” offers at the register.

A Macy’s spokesman told the Wall Street Journal, “Instant credit is important because it is another service that we can offer the customer that the customer considers to be valuable.” The newspaper notes, however, that the real reasons retailers love instant credit is because they can use store cards to track customer habits, and because they help move merchandise: “In the third quarter, more than half of Macy’s sales were rung up on store-brand credit cards.”

I instinctively distrust any group that doesn’t argue for its own best interests first before pretending to be looking out for the other guy; if you can’t tell me why something benefits you, without dragging your customer in front of me and venerating him like a Token Special Interest American at a State of the Union Address, then there’s probably something bad that you’re not sharing.

To that end, the National Retail Federation warns that verifying income before extending credit is “neither consumer friendly nor does it demonstrably improve the credit-granting process,” which pretty much instantly trips my bullshit detector. Making someone prove he can take on the debt before issuing it to him, and slowing down the credit application process so that rational though prevails, sounds pretty darned consumer friendly to me.

“Hurdle Emerges for Stores Pitching Credit Cards” [Wall Street Journal]

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  1. sleze69 says:

    Duh. Am I alone in thinking it is a no brainer that all credit cards should require income verification?

    • Skipweasel says:

      I’d have said so, but then apart from a now finished mortgage I’ve never used credit.

      • West Coast Secessionist says:

        Oh really? What idiot wrote your mortgage when you had zero credit history? That’s the stupidest thing I’ve ever heard, but I shouldn’t expect any different from one of those holier-than-thou credit hater types.

        Yes, you’re sooo much better than us people who use credit.

    • nottodaymam says:

      I can understand Sleze69’s reasoning, but on the other hand. It should be the responsibility of the consumer also, and if one is responsible and doesn’t have good, credit, or a good income, then they will not have the ability to have a sizable credit card/or if they get a better job will have to wait a year to get a better card. In that If what you say should be true then they will have to monitor your income on a regular basis and cancel your credit card if at any time your loose your job, even if it is bought out and they give you 5mill for that buy out, it won’t be represented in your income, since you don’t have a job, no more income, no more credit card(does this logic make sense?)

    • ArcanaJ says:

      No, you are not alone.

    • varro says:

      A couple years ago, even mortgage lenders thought that verifying income was too burdensome. Mortgage lenders like Washington Mutual, IndyMac Bank, and Countrywide – lenders that don’t exist any more.

    • jamar0303 says:

      Nope, you’re not alone. Out here you need your employer to verify your income before any bank will extend credit to you. I’m just a college student and have no income, so I can’t get any credit cards; the side effect is that no bank here offers a Visa/MC debit card so I can’t buy online from US stores (local online shopping is done by something resembling wire transfers- even auction purchases). But it’s better than extending credit without proof that I’ll be able to pay for it; I could, but I can think of a few people who would go wild and find themselves in a tight spot when the bill comes.

  2. nofelix says:

    “so that rational though prevails”

    Not when you were typing that sentence, Chris!

    Yeah, this should be in place already. Store cards are so often involved when people struggle under massive debt, it’s kind of surprising they haven’t been mentioned more in this issue. Or maybe they have and I’m blind.

    Anyway, income checks shouldn’t stop anyone from getting a store card apart from people who cannot afford one, obviously… so the NRF is basically saying they don’t want to give up selling things to poor people who can’t afford them.

  3. LESSTHANKIND says:

    Macy’s not only does not verify income on its application, but doesn’t even ASK for it. They approve/deny based on your Experian report and score (not FICO, but Experian’s own score).

  4. henrygates3 says:

    Don’t they also get discounted interchange fees on their branded cards? I know that for example Target requires all it’s employees to pay cash or use the Target card if they want their employee discount.

    • West Coast Secessionist says:

      I think it would depend on how much they own the credit card operation. Macy’s owns Department Stores National Bank, who issues their card, so they really shouldn’t be “paying” any interchange fees. I would _guess_ that other store cards (such as Gap and JCPenney cards which are issued by GE Money Bank) have agreements in place where the store, in exchange for promoting the hell out of the card, gets very very low or free interchange cost. Since store cards usually have ridiculously high interest rates, I assume the bank feels it’s getting a pretty awesome deal without charging interchange.

  5. jeffgentry says:

    For me, the question is not whether a company SHOULD require the information before extending credit. It’s much more fundamental. Should the government DICTATE the conditions under which one party extends credit to another?

    For the consumer, “instant credit” without income validation is unquestionably more convenient because it’s timely and easier. For the business extending credit, it’s their risk to take or not to take and their responsibility. They will live with the consequences if they make that decision poorly. The author’s rational in the last paragraph, and correct me if I get this wrong Chris, is that it’s good for the consumer to inconvenience him long enough to not make an irrational decision. Should the government step in to slow down every financial transaction to avoid a few people making irrational decisions. I would say not; this is inherent to freedom.

    Personally, I think it’s unwise for a consumer to use this kind of credit unless it’s giving him a promotional discount. However, it’s wrong for me to impose my value judgment in this regard on my fellow citizens. It infringes on their rights and liberty. This is yet another example of the Nanny State getting into contracts between two parties that should not be a concern of government. It’s also a reason I opposed this legislation. It hurts businesses and it creates inconvenience for responsible consumers, who I think are the audience for The Consumerist.

    • nofelix says:

      The whole sub-prime mortgage problem is caused by extending credit to people who cannot afford it.

      “For the business extending credit, it’s their risk to take or not to take and their responsibility. They will live with the consequences if they make that decision poorly.”

      Not if they’re bailed out by taxpayers.

      If store cards were rare products that very few people used, then I’d agree with you. Let the dumb people take credit if they want. But as we’ve seen, when a lot of people take on debt they cannot pay, it’s very bad for the whole country. And because of that, regulation is needed.

      • jdsmn says:

        Yes, but not really. It has a lot more to do with variable interest rates, which made the payments unaffordable, along with taking subprime home loans and selling them as a low risk investment.

        • Coelacanth says:

          Except the fact that variable interest rates are usually tied to the prime rate, which is at historic lows right now because of the financial crisis. This has prompted banks to reprice the cardholder accounts to tack on higher margins, or convert fixed rates into variable APRs.

          In any case, payment affordability due to interest rates are directly as a result of banks repricing for “risk,” not necessarily due to variable APRs themselves.

          However, once the Fed begins to increase interest rates again, that will be another story.

    • Oranges w/ Cheese says:

      They will live with the consequences if they make that decision poorly.

      No, the company has no real liability if a consumer defaults on their credit. See: current credit fiasco and “too big to fail”

    • ARP says:

      I agree from a libertarian perspective, but the problem is that when too many retailers extend too much credit who probably should not have it, it creates a systemic risk to the economy because major banks usually back these cards (some say credit cards will be the second wave of the economic crisis). So, until there’s a mechanism in place to stem/prevent/isolate that systemic risk, it is partially the government’s business. Now in these particular circumstances, it is a bit impractical. Since the retailers/banks will set their own rules for what income or debt ratios they’re willing to tolerate, I’m sure they’ll be just as aggressive as they were in the past. I think the way to help prevent this is on the banking side. Limit the size of banks, require a higher reserve, allow the government to quickly take over and liquidate a failed bank, raise the FDIC insurance rates, etc.

    • ihatephonecompanies says:

      Things like systemic risk aside, the consumer question here is whether or not (or to what degree) it is OK to hand people enough rope to hang themselves. While it’s clearly the case that the consumers are ultimately in control of how they use their credit, it’s also the case that a large enough proportion of the population is known to be bad with credit that too liberal lending policies, accompanied by heavy penalties, are a predatory practice. That is, it is bad for lenders to lend with the expectation that they will fool a certain number of unsophisticated consumers and that they will profit handsomely off them.

  6. HogwartsProfessor says:

    I can’t help but think that even with the Card Act, they’ll find some way to weasel around this. It’s simply too profitable for them not to.

  7. SabreDC says:

    I agree with the spirit of this CARD Act requirement; however, in practice, I think it is worthless. The requirement is to verify income and debts. Verify them against what? Macy’s, and other stores, would still have the say in what income and debt levels are suitable for extending credit. If Macy’s does not care about customer income (judging by the comment that they don’t ask about it), why would it matter if they verify a customer’s income to be $100,000/year or $100/year?

    Now, if a company asks for income level and only extends credit to people who make over $50,000/year, then yes, it should verify that amount. But if you are willing to blindly hand out credit, I see no point in this verification.

    • trentblase says:

      Exactly! I was wondering if there was an accompanying requirement to deny credit to people with a high debt/income ratio. Consumer protection with respect to credit is somewhat of a Catch 22 — if you paternally prevent people with too much debt from acquiring more, you help them get out of debt faster. However, without robust social programs in place, denial of credit may prevent someone down on their luck from obtaining the goods/services they need to survive (e.g. buying a suit to wear to interviews). I admit I have not read the act itself, but it seems the best solution would be to limit interest rates for high-risk customers, thereby protecting the customers and disincentivizing predatory lending (by making the risk outweigh the reward).

      • jesusofcool says:

        I agree with you that there are some people with limited income who may need a credit card and may also have some other means of handling the expense such as students and retirees.
        Store credit cards are one of the easiest and safest ways for students to build credit since they have a low maximum balance and they are traditionally easier to get than a bank credit card – many students are able to handle one or two of these cards without debt. Ditto for seniors whose social security check may not show substantial enough income but may have enough money squirreled away to be able to handle a credit card just fine.
        Yes, 90% of what the retailers are saying is corporate speak for ‘let us keep preying on our customers” but I don’t know if the solution is a government babysitter. I agree that a better solution would be to reform the credit system and make it more difficult to retailers to profit rather than making it more difficult for everyone to obtain credit.

  8. Christopher Mercer says:

    Hummmmmmm. Now I am not 100% sure on this but I am about 99% sure. When applying for a store card – silly I know – a few years back they did run a credit check right there at the counter. While proving an income level would certainly slowed the process (Getting proof, providing it, etc. It’s not like I carry a print out of my paystub all the time) it is one extra level of protection to both the consumer and retailer.

    Though, a credit check with intelligent software could quickly advise if a person is able to handle the debt based on the provided values.

  9. FDCPAGuy says:

    There are services to quickly verify income for a large population of the us. This method is theworknumber.com. I suspect services like this will play an increasing role in income verification for instant credit.

  10. Jesse says:

    Income verification might be a bigger issue than one would think. Is the bank going to request W-2’s and/or tax returns? How about if the individual is self employed? Would a P&L and Balance Sheet be sufficient or do they have to fork up bank statements to independently verify cash flow.

    It makes me wonder if the intent of this provision to try and push formal underwriting processes onto revolving credit.

  11. pop top says:

    While I agree with much of the CARD Act, I don’t see why the government is making other people responsible for consumers’ debt. I mean…Macy’s and Target shouldn’t be babysitting you by telling you no, you can’t have this card because you have three other cards and only make $30k/year or whatever. If you choose to be foolish with your money (e.g. by opening several credit accounts and spending more than you can pay), then that should be your problem.

    • rdclark says:

      So when the foolish unemployed consumer defaults on the debt, whose problem is it then? What happened the last time bad consumer debt became a financial commodity?

      • Scoobatz says:

        Are you suggesting that only low-income earners can fall into the “foolish unemployed consumer” category? Regardless of salary, anyone can rack up a huge debt and fall into financial hardship. Income level in not as important as income to debt ratio. Just because someone makes $100K a year doesn’t mean they have any intellegence to manage their finances properly.

  12. Oranges w/ Cheese says:

    I think they should, but I think that people will be all PRIVACY PRIVACY if they have to disclose something like that in public to some register-jockey.
    Or they’ll do what they always do and falsify the information and blame others when they default on their debt. C’est la vie.

  13. NydiaGeben says:

    Would YOU want to verify someone’s income before lending them money? Of course.

    • NeverLetMeDown says:

      That depends. If I’m lending them $1000, and they’re putting up a 3-bedroom Manhattan condo they own free and clear as collateral, then, no, I don’t care what their income is.

    • cash_da_pibble says:

      unless it’s family… then you’re screwed, either way.

  14. pop top says:

    All I’m saying is that it shouldn’t be required to check into someone’s background to see if they can pay. If the companies choose to do so to cover their asses, then that’s fine, but I don’t see why there needs to be a requirement to protect people from themselves

    • pop top says:

      I don’t know why this post didn’t go under the one I was replying too…

    • Oranges w/ Cheese says:

      The only reason it should be required now is that the companies were stupid about it and are asking us for help when it backfires on them. Yes, they should be culpable for their stupidity but more often then not they’re going to come to the govt. and say help me help me and they’ll say ok. When its the companies fault to begin with.

      The govt. has to protect us from those of us who are idiots and don’t understand that you don’t have money jsut ebcause you have checks left and your credit card isn’t invisible free money.

  15. haoshufu says:

    Double edged sword. You can prevent consumer from overspending while killing retail sales. Which is better?

  16. The Federalist says:

    This is coming from someone who’s pushed store cards at 2 different retailers. Verifying income is useless. By looking at income you are trying to determine whether the person will pay, which is what the credit score shows and what companies are currently using.

    What they should do is eliminate instant approval for Visa and Mastercard branded cards. If a business wants to take on the risk of sub-prime card holders then so be it, but do it on their own card. By enabling that customer to rack up debt at other locations should not be allowed.

    Now I know the branded cards are a selling point which is why if a customer wants such a card (redeemable for store points) then they should be given a online or paper application. There they can apply for such a branded card or to upgrade the instantly approved card they just received.

  17. LatherRinseRepeat says:

    If you have a great credit score, most credit card companies (and store cards) won’t verify income. Although this is generally a bad idea, I have to say that it helped me out a few years ago when I got laid off. It allowed me to apply for new credit cards and take advantage of 0% APR for balance transfers.

    So in the end, I paid no interest charges and was able to pay off my debts faster. And it allowed me to maintain (and improve) my credit score.

    I guess the lesson here is that people should be responsible for their own actions. We can’t rely on corporations/banks to be “moral” here and deny credit to potential deadbeats. If that were the case, then we wouldn’t have had all those banks fail in the past year.

  18. Scuba Steve says:

    “Consumer friendly” in the sense that a consumer is one who’s sole purpose in life is to consume, consume, consume.

    I don’t want to act like I’m holier than anyone else, but honestly, if it requires a store card to get it.. I don’t. I was ALMOST taken in by the Bill Me Later offers that show up on darn near every computer website, but then I realized that waiting a mere month would save me almost 100 bucks in fees.

    I have since gotten a credit card, which lets me earn points and have a buffer zone to make purchases since my bank likes to play russian roulette with my deposits and rent checks.

  19. Eyebrows McGee (now with double the baby!) says:

    I forgot to look at who wrote the article but as soon as I saw “venerating him like a Token Special Interest American at a State of the Union Address” I knew it was Chris. :D And I LOLed.

  20. halfcuban says:

    When their using my money (in the form of investments, savings, etc.) you better believe I am concerned about who they are lending it out to. More people should be up in arms just based on the fact that the money that all the bank’s loss was THERES. Is Macy’s a consumer, retail bank? No. But like other retail operations their line of credit I’m sure if furnished by major banks which do hold someone’s money on here.

    If I wouldn’t lend out the money on a personal basis, then my bank shouldn’t either. Its why i store my money now in a credit union with fairly strict rules on lending and does not take excessive risks with MY money.

  21. krom says:

    Well, they can just put a $3,000 hold on your debit card, right?

  22. Gtmac says:

    If a consumer that cannot afford additional debt is issued a card by a retailer there are two irresponsible parties. The consumer is irresponsible for taking on unaffordable debt and the retailer is lending money irresponsibly.

    The current economic and legal environment allows for consequences for the irresponsible consumer, but not for the irresponsible lender. This is lopsided and requires remediation.

    Unfortunately, it’s much easier politically to pass a law enforcing responsibility in lending up front than to enforce consequences for irresponsible lenders whose debtors default.

    • frank64 says:

      The store loses more in your scenario. They lose the money! They make a reasonable decision based one ones FICO, credit limits and use of credit limit. They have determined they don’t need anything else to grant credit. Right or wrong it should be their decision, if they lose they lose more than anyone.

      My experience is always been they loan much less than the limits on bank cards. If they see I have a FICO of 750, credit limits of 20K, a usage of 5K, and no late payments I am a good risk, and a store should do well to give me a card with a 2K limit to start off with. I don’t want to go through a whole application process, but I may accept the card if I can realize savings and it is easy.

      Let the give and take between me and the store take place, I don’t need anyone protecting me.

  23. Gtmac says:

    If a consumer that cannot afford additional debt is issued a card by a retailer there are two irresponsible parties. The consumer is irresponsible for taking on unaffordable debt and the retailer is lending money irresponsibly.

    The current economic and legal environment allows for consequences for the irresponsible consumer, but not for the irresponsible lender. This is lopsided and requires remediation.

    Unfortunately, it’s much easier politically to pass a law enforcing responsibility in lending up front than to enforce consequences for irresponsible lenders whose debtors default.

  24. humphrmi says:

    They are only re-implementing a rule that was in place for a long time, back in the “old days.”

    My first credit card application included a section where I had to list my income & debts. My understanding was, they spot-checked applications for accuracy, and if they didn’t spot-check yours and you mis-represented your income or debts, then they could claim that you violated your credit agreement with them and default you. Yeah, people cheated, but it was effective for the 90% of people who were honest. If you didn’t meet minimum income requirements, you didn’t get credit – which was probably a good thing.

  25. dragonfliLABS says:

    “In the third quarter, more than half of Macy’s sales were rung up on store-brand credit cards.”

    There was a reason why: Every single Macy’s rep was pushed over and over to sell the card to unwitting people. I’ve experienced it.

    Picture sitting in a line about 30 minutes long at a Macy’s. One register open, nobody else around staffing it, the cashier not following procedure (calling for another line to open). Oh, and sitting there for about 10 minutes explaining various restaurants in the greater Watertown, NY area.

    Instead… “Would you be interested in applying for a Macy’s Charge?”

    The lady ahead of us was Canadian. She explained that. The cashier’s response? “Over 75% of our local customers are from Canada, and instead of getting a bill they just come back and pay it here…”

    Instant credit is just a pain. A pain that we shan’t need at the register, even if it does give us 10% off our entire purchase that day.

  26. H3ion says:

    “A Macy’s spokesman told the Wall Street Journal, “Instant credit is important because it is another service that we can offer the customer that the customer considers to be valuable.”

    Yeah, and a discount lobotomy is another service Macy’s can offer. I can’t imagine why a credit provider wouldn’t make at least a rudimentary check before extending credit. Whether it’s income or assets, don’t you think the store might want to get paid for its merchandise?

    • madanthony says:

      My guess is that in Macy’s experience, whatever their default rate is, they’ve found that the additional purchasing and data collection from store credit cards, and the money they make from interest from people who do pay their bills, far outweighs them.

      Of course, those stats can change – it used to be that almost nobody walked away from a mortgage. But I also doubt that a Macy’s card is the thing that’s driven too many people to the brink. What is the normal credit limit on a store card, anyway? $500?

  27. sybann says:

    What frosts my cookies? AmEx is doing this to me NOW. After more than fifteen years with no late or missed payments and three cards (2 of which have NO balance – one with an annual fee) I had to give them permission to look at my tax return from last year – or there was a notso vague threat that my cards would be frozen.

    It’s good that they can’t just offer credit to people willy-nilly but it’s personally aggravating to be filling out forms and faxing a company I pay to provide a service so they can do something they should have done BEFORE offering me credit 15 years ago.