Starting February 22, as the Credit CARD Act of 2009 takes effect, anytime you apply for a new credit card or your credit limit is increased on an existing account, card issuers must consider whether you can actually repay the card loan. In many cases, that will mean a “behind-the-scenes” financial checkup on a credit card applicant's income or assets.

You'll be judged by new statistical tools – called income estimation models – created by the major credit reporting bureaus and approved by the Federal Reserve for use in assessing ability to pay. The tools will estimate a consumer's income based on card application information, credit bureau data and information from employment and IRS tax databases.

Major retail stores had complained to the Fed that its ability-to-pay rules, as initially proposed, could kill instant in-store credit offers pitched to shoppers at the cash register. The proposed rules had required card issuers to collect financial information from applicants, but final credit card reform law guidelines issued Jan. 12 by the Fed allows issuers to use statistical income estimation models developed by the credit reporting bureaus.

With only two weeks until the rule takes effect, retailers will be scrambling to put the new income screening procedures in place. Retailers had asked the Fed to consider waiving the ability-to-pay rule for accounts with relatively small credit limits. Regulators rejected that suggestion, however, noting that even low credit limit accounts could still have a significant impact on a particular consumer, depending on the consumer's financial state.

Consumer groups had asked the Fed to consider placing more stringent income requirements on people under 21, such as requiring them to have lower debt-to-income ratios or only considering income from wages they earn. Regulators, however, declined to make it harder for young adults to show ability to pay, saying the rules established for all borrowers were sufficient for young people and avoided "unnecessarily impinging on their ability to obtain credit and build a credit history."

Why the higher standards?

The credit card reform law includes a provision requiring credit card issuers to take additional steps to prevent customers from getting in over their heads in credit card debt. The goal: preventing someone with no income or assets from getting a plastic license to spend that could lead to bankruptcy.

Under the final ability-to-pay rules, card issuers must create policies and procedures for reviewing ability to pay credit card debts that consider at least one of the following: the ratio of the consumer's debt obligations to income; the ratio of debt obligations to assets; or the income the consumer will have after paying debt obligations. The debt-to-income ratio is a common financial measure used to determine financial stability of an individual or company. It is the amount of debt owed as a percentage of the amount of income available to repay it. The lower the ratio, the better.

Regulators said card issuers may consider, among other things:

• Salary, wages, bonus pay, tips and commissions from full- or part-time, seasonal, military or irregular jobs and self-employment.

• Interest, dividends, retirement benefits, public assistance, alimony checks, child support and other kinds of maintenance payments.

• Savings accounts or investments.

• Credit reports and credit scores.

Card issuers will not be required to verify income amounts reported by consumers – a provision sought by consumer groups as an additional safeguard against people overstating their incomes to get higher credit limits.

Income should not be the deciding factor

Banks and retailers argued that knowing how much a cardholder earns does not help lenders determine whether they will repay their credit card bills. Past payment history – as shown in credit reports and in credit scores – is a better indicator of ability to pay.

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