Your income doesn’t have a direct impact on your credit score, but it can have indirect effects. A loss of income, a gap in cash flow, or a sudden layoff can have you feeling a financial pinch. These circumstances could hinder your ability to pay your bills, which can ding your credit. Additionally, your income can impact your ability to open a credit card or take out a loan.
Here, take a closer look at how your income and salary could affect your credit, as well as what other factors directly determine your credit score.
Key Points
• Income indirectly impacts credit scores through its influence on payment history and credit approval processes.
• Payment history is vital, accounting for 35% of the FICO score.
• Maintaining a credit utilization ratio below 30% is crucial for a healthy credit score.
• Lenders evaluate debt-to-income ratio and income for credit approval, which can indirectly affect credit scores.
• A diverse credit mix and the age of accounts are important factors in credit score calculation.
Does Income Affect Credit Score?
Your income does not directly affect your credit. That’s because the financial information that’s found on your credit report is primarily related to debt. As such, information like savings or checking account balances, investments, and income do not appear on your credit report.
Beyond that, there is quite a bit of information that a credit report explicitly cannot include. These exclusions are made in an effort to prevent lenders from potentially being biased or discriminating based on race, religious affiliation, and other personal details. The following information — including income — is not included on credit reports:
• Income
• Employment status
• Marital status
• Religious affiliation
• Race or ethnicity
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What Then Impacts Your Credit Score?
While income doesn’t affect your credit score, what does impact your score has to do with your ability to be responsible with credit. Different credit scoring models vary slightly in the way they calculate credit scores. However, they generally look for signs of creditworthiness, which is your reliability in paying back money based on past behavior and financial habits.
Here’s a closer look at what affects your credit score.
Payment History
Payment history makes up the lion’s share of your FICO® Score, accounting for 35% of your credit score. Making timely payments on your bills and debt, such as your credit card balances, car loan, or personal loan, is crucial to establishing credit.
For this reason, understanding when credit card payments are due and meeting those deadlines is an important financial habit.
Credit Utilization
Your credit usage, or credit utilization ratio, can impact your credit score significantly as well. Specifically, this makes up 30% of your FICO Score.
Your credit usage is your total outstanding balance among all your credit cards against your total credit limit. This is expressed as a percentage. For instance, if you have a $500 credit card balance, and the total limit on all of your cards is $5,000, then your credit usage is 10%.
You’ll want to aim to keep your credit utilization ratio under 30%, preferably closer to 10%. Credit usage over 30% can negatively impact your credit, as it indicates to lenders that you might be stretched too thin financially.
Age of Accounts
How long you’ve had and managed debt also impacts your credit score. This makes up 15% of your FICO Score. Keeping your old lines of credit open can help build your score by extending the age of your credit accounts.
Credit Mix
Having a healthy mix of different types of credit — think installment loans like a car or personal loan, a mortgage, credit cards, and other accounts — can also help with building credit. Your credit mix makes up a smaller portion of our FICO Score at 10%.
New Credit
If you’ve recently opened several new lines of credits or had a bunch of different hard vs. soft credit pulls from applying for credit, this could negatively impact your credit. This is because it can suggest to lenders you’re in need of funds and thus a potentially higher risk. New credit accounts for 10% of your FICO Score.
Recommended: Does Applying For a Credit Card Hurt Your Credit Score?
How Your Income Can Indirectly Affect Your Credit Score
While income doesn’t have a direct impact on your credit score, it can still affect your score in a couple of ways.
• First, if you’re tight on money due to a recent job loss, reduced hours at your work, or a gap in cash flow, your reduced income could impact your ability to stay on top of your debt payments. As payment history makes up 35% of your FICO score, falling behind or missing payments altogether could result in your credit score taking a hit. In turn, a regular paycheck can help build your credit score because it can help you to more easily make on-time payments.
• Your income can also impact your credit score because income is something that lenders typically look at when you apply for a line of credit. Because your income can affect your odds of getting approved for a loan or credit card, it can indirectly impact your credit mix and length of credit, which both play into your credit score.
Recommended: Difference Between Income and Net Worth
How Your Income and Debt Impact Credit Approval
When lenders evaluate your application, one factor they may consider is your debt-to-income ratio, which is the percentage of your monthly income that goes toward paying down debts. The lower your income, the more easily you can have a higher debt-to-income ratio, which could affect your odds of approval.
Additionally, when you apply for a loan or credit card, lenders will typically request proof of income, such as a paystub or a tax return. Having a low income could affect your odds of approval, as well as the amount of the loan or credit limit you’re approved for.
Recommended: Understanding Different Types of Credit Cards
The Takeaway
While the size of your paycheck doesn’t directly affect your credit score, it can impact your ability to stay on top of your debt payments. This in turn can influence your score. Understanding exactly what financial factors do impact your credit can help you to be mindful of financial behaviors and patterns that will keep your score in tip-top shape.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
How much does your debt-to-income ratio affect your credit score?
While your debt-to-income ratio doesn’t directly impact your credit score, it can affect your odds of getting approved for credit. If your debt-to-income ratio is too high, it’s a sign that you might be stretched thin moneywise. In turn, lenders might be less likely to extend credit to you.
Why do credit cards ask for income on applications?
Credit card issuers request your income on applications to gauge whether to extend you credit and to determine how much of a credit limit to offer you.
How much annual income do you need to be approved for a credit card?
While there’s no set number and credit card companies rarely post whether they have a minimum annual income requirement, they do take into account your income when looking over your application. Note that your annual income isn’t the only factor that credit card issuers look at when determining whether to approve your application though. Other factors like your debt load and credit score are also taken into account.
Will my income show up on my credit card?
Your income will not show up on your credit card, nor will it show up on your credit report. Personal information such as income isn’t permitted on your credit report to avoid the possibility for discrimination or bias.
How does my income affect my credit limit?
If you have a higher income, you could get approved for a higher line of credit. This is because you’ll have more available funds to pay off any debt you incur.
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