Does Income Affect Your Credit Score?

Your credit score and income are indicators of your overall financial health. But it is sometimes unclear to borrowers how their job and income affect their credit scores. This article will cover the relationship between income and credit scores, what specifically impacts credit scores, and how you can use your income to change your credit score. Most importantly, we’ll answer your question, how does income affect credit score?

Highlights & Key Takeaways

• Your income does not directly impact your credit score. 
• Your income affects your ability to pay bills and repay debt, which are important factors in credit score calculation. 
• Lenders may consider your credit score and income when making their decisions. 
• A higher income is often correlated with a higher credit score.

Does Income Affect Credit Score

Credit scoring systems do not consider your income, and your job and salary do not dictate your credit score. Instead, the three major credit bureaus (Experian, Equifax, and TransUnion) look at various factors such as your credit history, payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries to determine your creditworthiness. But this doesn’t mean your income doesn’t indirectly affect how much you can borrow. 

How Your Income May Indirectly Affect Credit Health

Your income can indirectly affect your credit score. Consider that the average personal income in the U.S. is $63,214, with the median income across the country being $44,225. Suppose you have a high income well above the national median. With that income, you will likely make larger debt payments, improving your credit utilization ratio and making you look less risky to lenders and creditors. Additionally, if you have a low income, keeping up with your payments may be more difficult, negatively affecting your payment history.

While your credit report does not list your salary, research has found some correlation between higher income and higher credit scores.  Here are some ways your income indirectly impacts your credit score. 

• Ability to pay bills: The higher your income, the easier it is to keep up with your bills and always pay on time. And late or missing payments can hurt your credit score by as much as 180 points.  
• Reliance on credit: If you have a lower income or sudden loss of income, you may need to rely more on credit cards and loans. This can result in a higher credit utilization which can hurt your score. 
• Access to credit: Your income impacts your ability to access credit. When making credit decisions, lenders and credit card companies consider income and consider your debt-to-income (DTI) ratio. Generally speaking, the lower your DTI, the better. Further, a higher income means you may access higher loan amounts and credit limits, which can influence your credit utilization and mix. 

What Does Affect Your Credit Score 

While income isn’t used to calculate your credit score, five factors are; your payment history, amounts owed, length of credit history, credit mix, and new credit. Information related to these five factors is included on your credit report and is used to generate credit scores. 

Here is more information on what the FICO credit scoring model, the most commonly used model which gives borrowers a credit score between 300 and 850, takes into account: 

Payment History

Your payment history is the biggest factor used in your credit score calculation. It represents 35% of your FICO score calculation and more in the VantageScore calculation (41%). This is why it is so important that you pay your minimum amount due every month on or before your payment due date. Failure to make your timely payments can cause your credit score to drop. Missing just one payment and failing to make it up within 30 days of the due date can make your credit score take a hit of as much as 180 points. 

Amounts Owed

Also referred to as utilization, the amounts you owe impact your credit score by 30%. The credit bureaus look at how much you owe compared to your available credit. And the rule of thumb is to keep your balances at 30% or less of your available credit limit. If you have a credit card with a limit of $10,000, you should ensure your balance stays at $3,000 or less. 

Length of Credit History

Your credit history represents 15% of your total credit score. It takes about six months to achieve your first credit score, and you begin building a credit history as soon as you get your first credit card, or loan or become a user on someone else’s credit card. A long credit history developed over time can positively impact your credit score by demonstrating creditworthiness, improving your credit utilization ratio, showing stability in your ability to make timely payments, demonstrating a healthy mix of credit, and more. 

Credit Mix

Your credit mix, sometimes called credit diversification, accounts for 10% of your credit score. The goal is to ensure you have multiple types of credit and don’t put all your eggs in one basket. For example, perhaps you have a mortgage or pay rent, have an auto loan, and have two or three credit cards. This is considered a healthy mix and will favorably affect your credit score if you manage them well. But having six or seven credit cards might not look as good.

New Credit 

This factor represents 10% of your credit score and indicates how often you apply for new credit. Generally speaking, you should wait to apply for new credit until you need it. Here are some common reasons why waiting can help:

• If you want to buy a new house: If you recently applied for multiple credit cards, those  hard credit checks can look poorly on your credit score. It can signal to the mortgage lender that you are desperate for more credit. 
• If you are rebuilding your credit score: Too many new accounts can cause your score to drop.
• If the welcome offer isn’t worth it: The higher your credit score, the better the offers and perks you might receive. 

A good rule of thumb to consider is the 2-3-4 rule. This rule indicates you should apply for no more than two new cards within 30 days, three new cards within 12 months, and four new cards within 24 months.

Do Lenders Consider Your Income?

Your income is considered a capacity measurement, not your credit risk. Yet, while income doesn’t directly impact your credit score, it can indirectly impact you since you need sufficient income to pay your bills. For example, lenders will often use your income to calculate your DTI, the percentage of your monthly income that goes toward debt payments. This helps lenders evaluate your ability to manage additional debt payments if you take on a new loan or credit card.

But there are other factors that lenders look at when considering your credit application.

Other Factors Lenders Look at When Considering Your Application

Your credit score can directly impact the type of credit offer you receive. But, they are not the only factor lenders consider when determining rates and terms. 

• Credit history: Lenders use your credit history to assess your creditworthiness and determine the risk of lending you money. This can directly impact the interest rates you are approved for, how much you can borrow, and whether you are approved in the first place.
• Capacity: Your capacity looks at your income and your DTI. More specifically, your capacity can impact your interest rate, loan amount or credit limit, and whether or not you are approved. If you already have too many credit products, the lender may determine you are too risky.
• Collateral: If you have a low credit score, the lender may ask for collateral to secure your credit card or loan. The higher your credit score, the less likely you will need to provide collateral. Common types of collateral include real estate (your house), vehicles, jewelry, the money in your savings account, and even valuable equipment in your home.
• Capital: Refers to the amount of money and assets you have available to use as collateral or repay the loan if you default on your payments. High capital can increase your chances of getting approved for a loan or new credit card.
• Conditions: The conditions include those things that you can’t directly impact but can impact your ability to repay your loan. Conditions could include current interest rates, the economic climate, market, and regulatory conditions.

Credit Score Differences Across Income Levels

Though your financial behaviors impact the factors that go into your credit score, your income level can also play a role. As we stated earlier, how much you earn may have a “moderate correlation” with your credit score. Consider this analysis conducted by the New York Fed.

While a higher income is correlated with a higher credit score, the low income still had an average credit score on the high end of FICO’s fair credit score range (580 to 669). The study found that a lower income could result in a lower ability to pay debts consistently. And a higher income could make it easier to make those payments. Further, with a higher income, you might be more likely to get approved for a higher borrowing limit which can help keep utilization low. 

But what is important to remember is that despite income levels, borrowers are responsible for deciding how much they spend and when. When a proper budget is maintained, and borrowers don’t spend in excess, their income shouldn’t dictate their ability to make timely payments and keep balances low.

Using Your Income to Improve Your Credit Score 

This all said, while income does not have a direct impact on your credit score, you can definitely use your income to improve your score. And, with a higher credit score, you are more likely to be approved for personal loans for excellent credit, which means lower interest rates and better loan terms overall.

Here is how you can make your income work for you:

• Pay down your debt: Paying off your credit cards can help improve your score. So, pay your minimum due each month and pay more when you can. And if you have extra cash each month, consider applying the snowball or avalanche method to get those balances as close to zero as possible. 
• Ask for a credit limit increase: If you get a promotion or raise, you should report that new income to your bank and credit card issuers. Doing so could lead to a credit limit increase which can help improve your utilization and get you access to better interest rates and perks.
• Build up your emergency fund: Having an emergency fund helps ensure you have enough to cover your bills and helps you to avoid maxing out your credit cards. A good guideline is to have three to six months of living expenses in your savings account. This can help cover expenses in the event of a job loss, pay for a medical emergency, or even fund a special activity for you and your family.

Final Word

Your income, whether in line with the U.S. average or higher or lower, is not directly linked to your credit score. However, you can use your income to improve your credit score. Ensuring a good payment history, keeping your balances low, and putting money into savings are all strategies that leverage your income to improve your credit score and ability to access better terms in the future.