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Preferably viewed as a convenience, credit cards sometimes become a necessity. In the event of unemployment, there are a few options for credit card approval. But beware the buyer: depending on the situation, credit cards with no income can make or break credit.
The CARD Act of 2009 requires credit card companies to analyze an applicant’s “ability to pay” before approving a consumer for a credit card. The review is usually based on an applicant’s existing debt, credit history, credit rating, and income, but not necessarily whether the applicant has stable employment. Credit card companies want to make sure that customers don’t borrow more than they can afford to repay.
In the event of unemployment, other income may be indicated on a credit card application. Some of the income options listed below only apply to people over the age of 21, and it is recommended that you confirm with a credit card company the requirements for an application.
Applicants can report any income to which they have reasonable access, such as:
- Partner’s or spouse’s income accessible through deposits or a joint current account
- Social security payments
- Investment payments
- Unemployment benefit
- Rental property income
- Inheritances or trust funds
- Child support
- Distributions from the retirement account
- Remaining financial aid (for students)
Credit card issuers typically compare an applicant’s income to any existing debt. If this “debt-to-income” ratio satisfies the lender, the applicant is more likely to be approved. Applications also typically ask for rent or mortgage payments, loan payments, and any other bills or expenses that could interfere with an applicant’s ability to pay.
If the unemployed do not have a source of income to list, there are still a few other options available to consider when looking for a line of credit.
1. Become an authorized user on someone else’s card.
Potentially the easiest way to access a credit card without having any income, becoming an authorized user is to convince a friend or family member to add a user to their own card. Having an income is not a condition for being Authorized user. The authorized user gets their own credit card with their name and information, but the person who owns the account (the primary cardholder) is responsible for all payments. If the authorized user spends more than expected or does not reimburse everything, this puts the account holder at risk (especially if they cannot reimburse the balance themselves). For this reason, it is advisable to set a responsible spending limit and payment plan with the account holder.
2. Get a co-signer
For applicants with trusted friends or family members, some credit card issuers allow co-signers. Young students hoping to start getting good credit may find a co-signer especially helpful. In co-signer agreements, the account holder remains responsible for paying the balance, but the co-signer becomes a fallback in case the account holder does not pay their bills. This can be extremely risky for co-signers as it can impact the credit scores of the account holder and the co-signer if the accounts are not well managed.
3. Get a secure credit card
A great option for those with savings that can be offered to maintain good credit while looking for a job, secure cards involve an account holder paying a refundable security deposit to assure the issuer that monthly bills will be paid. The deposited amount becomes the credit limit and the deposit will be refunded once the account is closed or upgraded to a regular unsecured credit card (assuming the balance is paid in full). Since the issuer usually reports to the credit bureaus on the card, this is also a great way to rebuild credit. However, the bank subscription criteria still apply.
At the end of the line
It is imperative to take into account all the risks before applying for a new credit card in the event of unemployment, as it would be the case when applying for a line of credit under any circumstances. Make sure the balances don’t skyrocket and will be paid off monthly to avoid paying interest charges.
Annual percentage rates (APR) for credit cards are generally high (sometimes over 20% per year). Unemployed cardholders could end up paying a significantly higher amount in the end if they only pay the lowest minimum payment each month. Paying off the balance every month is the only way to avoid paying high interest rates. Late payments can also hurt credit scores and rebuilding credit takes time, during which potential loans or card applications will be negatively impacted.
Unemployment can be appalling. But there are options for creating and maintaining credit while finding other employment.