Ability to Pay – One Year Later

Navigator Edition: April 2012
By: Daniel Kreis and Meryl Dann

It has been over a year since the Ability-to-Pay clause of the Credit Card Act of 2009 became effective, and uncertainty continues to dominate the issuing industry.  While there have been regulatory guidelines published, they allow considerable flexibility to the issuer in complying with the act.  Some of the challenges faced by issuers include:

Individual Income:

In a March 18, 2011 Press Release, the Federal Reserve Board stated:

“Specifically, the rule states that credit card applications generally cannot request a consumer’s ‘household income’ because that term is too vague to allow issuers to properly evaluate the consumer’s ability to pay.  Instead, issuers must consider the consumer’s individual income or salary.”
A survey of credit card applications reveals that major card issuers have migrated away from “household income” to simply “annual income”.  None have specified “individual income,” leaving wiggle room for consumers (and regulators who recognize the negative impact of a clearly defined individual income requirement).

The social impact of an individual income requirement is far reaching as it makes it exceedingly difficult for stay-at-home moms and dads to obtain credit.  Many industry observers have gone so far as to state that this requirement has set back the cause of women a generation, erasing the progress made from ECOA.

Calculating Ability-to-Pay:

Our work with issuers and Figure 1 reveal a great deal of diversity in the calculation of ability-to-pay.  Note that only American Express asks for “assets” in the sample and a large percent do not ask for mortgage or rent information.  We have seen a great deal of diversity (and uncertainty) in bank policy in the following areas:

  • Payment Calculation – Most issuers use the credit report to determine an applicant’s monthly minimum payments on revolving credit.  This calculation is determined by the issuer and treatment varies (e.g., some apply 100% of the American Express balance while others apply 3% of the balance as the payment).
  • Debt-to-Income Hurdle – We have seen the debt-to-income cut-off range from 40-100%.  For over 40 years, predictive model developers have sought to improve our ability to measure a consumer’s ability to repay a debt.  Although it was a candidate to enter scoring models, rarely has “debt-to-income” provided enough predictive value to enter the final calculation.

Asset Determination:

While most issuers do not ask for assets on credit card applications, assets are used by issuers that have deposit relationships with the consumer.  In allocating assets to be used in ability-to-pay calculations, issuers use a variety of approaches.  For example, funds owned by multiple people are allocated at a percentage of ownership.  Jointly owned debt, however, is fully allocated to the applicant.

Recently, Chase indicated that the ability-to-pay requirement has caused a 5-7% drop in approval rates.  Further, for some regional issuers that source applications through branch networks, ability-to-pay has become the number one decline reason, surpassing credit bureau delinquency.

In our opinion, the key to success will be for each issuer to have clearly documented criteria, apply it consistently, and develop empirical evidence to validate policy.

Figure 1: Ability to Pay Application Tracking


Source: First Annapolis Consulting research and analysis.

For more information, please contact Daniel Kreis, Director of Portfolio Management specializing in Card Issuing,; Meryl Dann, Senior Analyst specializing in Merchant Acquiring,

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