Does Your Income Affect Your Credit Score?

If you’re like most people, you probably want to make sure that you have maintain the best credit score possible, so you might be wondering whether your income affects your credit score? We will answer this question in much detail below.

Does Your Income Affect Your Credit Score?

No, your income does not affect your credit score. In fact, your income is not even reported to the credit reporting bureaus to impact your credit score, as such it’s not considered by the credit reporting bureaus when calculating your credit score. Technically, you could have no income and have excellent credit so long as you’re making all of your payments on time. So, you can be the wealthiest person in the United States or the poorest person, and that fact will have no effect on your credit score.

The following items are not considered when calculating your credit score:

  1. Income
  2. Employment Status
  3. Marital Status
  4. Religious Affiliation
  5. Geographical Location

The following items are only factored in when calculating your credit score:

  1. Payment History – 35% of your credit score
  2. Account Balances – 30% of your credit score
  3. Length of Credit History – 15% of your credit score
  4. New Credit – 10% of your credit score
  5. Credit Mix – 10% of your credit score

These are the only factors that impact your credit score. You should also keep in mind that negative information, such as collection accounts, bankruptcy, and other negative items can lower your credit score, but income does not affect your credit score.

That said, although your income does not affect your credit score, you should not be surprised by the fact that lenders and creditors do ask for your income and your income does affect their decision as to whether to lend you money or extend credit to you. If you’ve ever filled out a credit card or loan application, you may have noticed that one of the main things that lenders ask for is your income. This is so because lenders want to verify your ability to repay the money you want to borrow from them.

How Does Your Income Affect Your Credit Score?

Although your income does not directly affect your credit score, it does indirectly affect your credit score because if you do not have income, you may be unable to pay off your credit cards and loan accounts. Missing payments on such accounts can cause significant damage to your credit score. A single missed payment can knock down your credit score by over 100 points. The higher your starting credit score, the bigger the drop will be.

Also, you should distinguish between your salary and your income. Your salary refers to the amount of money that you earn from working, and it’s usually reported on your W2. However, your salary is only a part of your income. If you receive money from other sources, such as stock or bond sales, rent, child support, or alimony, all of these are considered as income. So, if you’re applying for credit or a loan, you should include them as income to improve your odds of being approved.

Does Your Income Affect Your Ability to Obtain Credit?

Now that’s we’ve established that your income does not affect your credit score, you should be aware that your income does affect your ability to obtain credit cards, loans, mortgages, and finance or lease a car. This is so because lenders and creditors use your income to determine whether you have the financial ability to repay the money you’re seeking to borrow them. If you do not have the financial ability to pay off your debts, you will likely not be approved. That’s a good thing. Because if you’re approved for a loan or credit card that you cannot pay off, you may cause significant damage to your credit.

When determining whether to lend you money, many lenders will measure your DTI (debt-to-income) ration. If this ratio is high, they may be unwilling to lend you money. For example, many lenders require a DTI of 36% or less, while others want to see a DTI of 43% or less. Every lender is different, but you should be aware that this measure is used to determine whether to lend you money. So, your income does affect your ability to obtain credit, and this is a good thing to prevent you from falling behind on your payments.

If you were denied credit or a loan because your DTI is too high, you should consider paying down some of your account balances to reduce your debt to income ratio. Another option is to increase your income to reduce your debt to income ratio. If you cannot do either, you should consider looking for a cosigner to cosign your loan. If a cosigner is added, the lender will consider his or her income in addition to yours. That said, the cosigner should be aware that he or she is responsible for payments in the event that you default on them.

What Affects Your Credit Score The Most?

The biggest factor affecting your credit score is your payment history. Your payment history accounts for 35% of your credit score. So, if you want to improve your credit score, the main thing that you should focus on is making your credit card and loan payments on time. Making your payments on time can significantly boost your credit score. At the same time, missing a single payment can cause significant damage to your credit score, so avoid missing payments to maintain a good credit score.

The second factor that has a huge impact on your credit score is your account balances or credit utilization. Your credit utilizations accounts for 30% of your credit score, so lowering the balances on your credit cards and loans is an excellent way to improve your credit score.

These two factors affect your credit score the most and account for 65% of your credit score. So, if you want to improve your credit score, these are the first two categories that you should tackle.

Does Low Income Reduce Your Credit Score?

No, low income does not reduce your credit score because your income is not factored into your credit score, as such having low income will not reduce or lower your credit score. That said, if you have little income and you have credit cards and loan account payments that are due, you might have difficulty making them. You should strive to make your payments on time because although low income does not directly impact your credit score, if you’re unable to make your payments, you will cause significant damage to your credit score. So, make sure that you have enough income to continue making your credit card and loan payments on time.

Does Higher Income Increase Your Credit Score?

No, having a higher income does not directly increase your credit score because income is not factored into your credit score. However, if you use your high income to pay down account balances and make your account payments on time, you will indirectly improve your credit score by doing so. If you have any questions or comments, please feel free to leave them in the comments section below.