When you apply for a new credit card, there are pieces of information that you have to disclose during the application process. One of the most important is annual income. However, that concept is a bit more complicated than its name may lead you to believe.
Why Disclose Your Income?
In 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD) was passed to protect consumers from predatory credit card practices. One of the provisions of the CARD Act was to institute income requirements to get a credit card.
No particular income level was specified, but each individual merchant or credit card company had to verify that the applicant could meet the minimum monthly payment.
Companies could ask for a pay stub or W-2 to verify both annual gross and net incomes. Most credit card applications ask for annual net income.
Annual Net Income
When you put the words “annual net income” together, the number you put on your credit card application isn’t quite as straightforward as it sounds. Annual net income is the amount of money you make in a year after all deductions and taxes are subtracted out.
What do the parts of "annual net income" mean?
- Annual: The definition of “annual” is “yearly.” On a credit card application, you report the amount of income you receive on a yearly basis. If you are an employee who works on a salary, it’s easy. You report the amount of salary you receive each year. If you work for hourly wages, it’s a little more complicated. Using your calculator or computer, multiply your hourly rate by the number of hours you work in a week. Multiply your answer by 52 weeks in a year. You have approximately your annual salary. For example, if you earn $8.00 per hour and work 30 hours per week, you have $240. Multiplied by 52 weeks, that is $12,480. If you are self-employed, you'd use the income that you allocated to the year under cash or accrual accounting basis.
- Net: Net is your take-home pay. This is how much you take home and either cash or deposit in your bank after all deductions are taken out by your place of employment. Usual deductions are federal and state taxes. Local taxes are deducted as well, which may mean county, city, and potentially school taxes, depending on where you live. There are also deductions for Medicare and Social Security. You may have deductions for savings plans, including retirement savings like a 401(k). There may also be a deduction for health insurance. If you are self-employed, you would deduct the expenses necessary for the income generated and any include tax deductions allowed under self-employed status.
- Income: Income is one of the most important parts of the approval process for a credit card application. Only your credit score is more important. Not only is income critical for approval, but it is also essential for determining your credit limit. Income is not just your salary or the total of your hourly wages. It can include other items. You should make your income as high as you legally can on your credit card application. An amendment to the CARD Act of 2009 broadened the definition of income for credit card applicants.
Annual gross income is your income before anything is deducted. Credit card companies usually prefer to ask for net income because that is what you have available with which to pay your monthly payment. Some companies may ask for annual gross income.
What Qualifies as Income?
The definition of income varies by age. For anyone over 21 years of age, income can be:
- Personal income
- Income from a spouse or partner
- Trust fund distributions
- Social Security distributions
- Retirement Fund distributions
- Scholarships and grants
- Allowances and gifts
For anyone between ages 18 and 20, income can be:
- Personal income
- Allowances that can be verified by tax returns or other documents
- Scholarships and grants
Student loans are not income. They are debt.
Some credit card companies allow you to include income that can be variable, such as military allowances. That income could stop and start.
Income from investments in stock and rental property is also variable. With stock, the market goes up and down, and so does the value of your portfolio. With a rental property, you may have your property fully rented or not.
Royalty income in oil and gas, for example, is very uncertain, but some banks allow it to be included. The same is true for royalty income in areas like bookselling and publishing. People who work as freelancers tend to have very uncertain incomes, but banks often approve freelance income.
Even stay-at-home parents can get a credit card if they report shared income from a working spouse or partner.
Whatever you do, don’t be tempted to lie about your annual net income on a credit card application. That is credit card fraud and could cost you $1 million in fines and 30 years in prison.