What is Credit Card income estimation?

Income estimation is a new way of finding whether a person can pay off a credit card.

After the credit crunch many credit card companies were criticized for advancing credit to people who did not have much of a chance of paying the money back.  This was because credit card companies were solely relying on what people said on their credit card applications.  Income estimation is a way of double checking the income to ensure that the card can be repaid.

Income estimation uses various factors to check whether the income that is given on the application is broadly accurate.  This includes the credit record and information about the employment.  There are a number of databases that income estimation can access.  The idea with income estimation is not to second guess the income but rather to see if the income given in the application is considerably out of line with the details given by the applicant.  If there is a considerable discrepancy then further details are requested, such as pay slips or bank account statements in order to verify the figures that have been given on the application.

Income estimation was first developed in America when card issuers were similarly criticized for relying too much on the information given in credit applications.  Credit card applications commonly overstated income and so many borrowers had more debt than they could cope with when there was a down turn in economic conditions.  The criticism was made that many credit card providers were well aware that the income figures were often inflated, but that they were still lending regardless.  It was proposed that these lenders should only be allowed to lend if they had seen evidence of income, such as pay slips.

This would have considerably slowed down the process of applying for a credit card.  In order to forestall this, a number of credit rating agencies developed an income estimation model in order to find when a borrower had a large discrepancy between their income and available information on their income.  If there was no large discrepancy then the applicant could be fast tracked as before, if there was a discrepancy then the applicant would be asked to provide more information.

This method is relatively crude in Australia as there is no access to tax records.  However it is being used by a growing number of card providers in order to cut down bad debt on credit cards.

If a card applicant is told that more evidence is needed then they should provide evidence such as bank statements, tax returns or recent pay slips.