How a Credit Law Change Boosted Women’s Spending Power

For years, lenders restricted credit access to low-earning partners in relationships, but a 2013 law change let them count household earnings, leading couples to spend more without falling behind on payments, according to forthcoming research in the Journal of Political Economy.

Prior to the change, in 41 states, “secondary earners” and stay-at-home parents in a partnership—mostly women—had trouble obtaining much credit because lenders were legally required to judge them on their own income, rather than the larger pool of shared wages couples brought in. That made it hard for these borrowers to independently obtain credit in their own names, often leaving them unable to make important financial decisions, Harvard Business School Assistant Professor Olivia Kim says.

The 2013 reversal of the Truth-in-Lending Act shifted that dynamic. “Policymakers realized that it was quite discriminatory because secondary earners and stay-at-home spouses are still predominantly women,” says Kim.

Kim’s research, “Credit and the Family: The Economic Consequences of Closing the Credit Gap of US Couples,” finds that when credit card application rules loosened, low earners’ credit limits grew, couples spent more, and purchases shifted to items that benefited the whole family.

With US credit card debt climbing to $1.26 trillion and card delinquencies elevated, according to the Federal Reserve Bank of New York, Kim says some lenders might hesitate to extend more credit to low wage earners. But she found no measurable rise in delinquency after these borrowers gained more credit, even as households took on more debt. Her advice to banks and marketers: Treat secondary earners as meaningful customers.

“One surprising aspect of the research is that you might think stay-at-home spouses would not be able to pay off their debt, but actually, their financial position tends to improve,” Kim says.

Consumer lending’s discriminatory history

Women have been able to get credit cards of their own only since 1974, when the Equal Credit Opportunity Act prohibited discrimination on the basis of gender and barred lenders from requiring a woman to apply jointly for credit with her husband. Previously, a bank would undervalue or disregard her earnings unless she could provide a “baby letter” saying she couldn’t have children.

Even so, state property law determined how lenders could treat a spouse’s income: Some states classify family income as “community property,” while others, known as “equitable distribution” states, treat income as belonging to the person who earned it.

The Truth-in-Lending Act was originally envisioned to prevent predatory lenders from encouraging students to open credit cards using their parents’ finances, but it had unexpected consequences for others trying to establish credit.

“It’s a policy that obviously was intending to help, in this particular case college students and young adults, and ended up having this unintended effect for women,” says Kim.

After all, access to more credit gives women facing divorce or abuse an easier way to start over, she says. “Being able to build that independent credit history and establish your financial footprint is very important on the job market and when you try to rent [or buy] a house,” Kim says.

A woman going through a divorce quoted in Kim’s paper recounted her struggle:

“I’m not a fan of credit cards, but trying to get a rental house was a huge nightmare because I was a stay-at-home mom, and all agencies required my husband to co-sign on our lease due to my limited credit history. I can’t get a loan for a new car, even though the 13-year-old one that I own has cost us more in repairs than a monthly payment on a more decent one would. It’s come up against me and my children and has made it extremely difficult for me to obtain any kind of security and peace of mind and start over.”

Women get a bigger slice of the pie

Kim analyzed financial account data from the JPMorgan Chase Institute before and after the 2013 law change. She focused on households in which secondary earners did not hold a sole credit card at the beginning of the sample period but opened one between October 2012 and December 2015. She compared consumers in equitable-distribution states, where the law reversal meant lower-earners could report broader family income when seeking credit, and borrowers in community-property states, where issuers could already count household income.

Specifically, Kim looked at outcomes before and after November 2013 for 66,200 opposite-sex couples, including 11,682 households in which the secondary earner opened a sole credit card. Digging into information from checking accounts, credit cards, and debit cards, she found these outcomes by 2015:

• With more access to credit, secondary earners spent more. Credit card limits of lower-income partners grew by about $1,500, and their share of consumption in households rose by 11%. Meanwhile, primary earners spent less, reducing the differences between spouses by half.

• Spending increased overall. Overall household consumption rose by $953 over the two years, or nearly $40 per month, 75% of which couples spent on products and services that benefited the family as a whole.

• How credit is provided matters, says Kim. “Independent account ownership has a distinct effect beyond simply expanding the household’s overall access to credit,” she says. “Having a credit card in one’s own name—and the independent financial footprint that comes with it—can increase an individual’s agency and autonomy within the household."

• Financial status didn’t change much. Households initially accrued higher credit card debt, about $115, during the first year and saved $87 less, but in the second year, couples increased household income to balance the loss.

• Borrowers paid their debts. Not only did delinquency rates fail to rise on average, but neither did overdrafts or the use of high-interest loans, such as payday loans.

“The headline result is that not only does household-level spending increase, but also the share of how the pie gets split in the household changes,” says Kim. “More of it goes to women, and women tend to spend more on goods that are good for the family, not just for themselves.”

Advice for companies and credit card users

Kim says that the paper offers takeaways for both couples and companies.

Spouses should communicate when making key financial decisions

“The more they coordinate, the more they're likely to be able to really maximize how much they can access from credit card markets,” says Kim. And lower earners, regardless of employment status, should maintain independent credit, she advises, giving them important “bargaining power,” especially if a marriage fails.

Companies should treat secondary earners as meaningful consumers

Understanding how those consumers’ spending differs from their partners’ habits could help businesses tailor their marketing to different customer segments and capture more household spending, including on family purchases, she says.

“Finding ways to really integrate the access that a couple has to credit would improve not just the transparency of where the money goes, but also their total borrowing power as a household,” says Kim.

Ownership and access are different things

“Giving someone access to credit as an authorized user or through a joint account may not be equivalent to establishing that person as an independent account holder, even if the products provide similar purchasing capacity,” she says. “Account design and ownership structure can shape customers’ financial behavior in ways that go beyond the amount of credit extended.”

Illustration: Ariana Cohen-Halberstam with image from AdobeStock.