Does income affect credit scores?

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In a Nutshell

Your income doesn’t affect your credit scores directly. But it may still affect your ability to get a loan, open a new credit card or pay your bills on time — any of which could indirectly influence your credit scores. 
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Your credit scores help determine things like whether you’ll qualify to borrow money, but does your income affect your credit scores?

Many factors are used to calculate your credit scores, including things like payment history, your current debts and even the length of time you’ve had an account open. But your income, banking history and certain bills aren’t part of the mix.

Still, income can have an indirect effect on your scores or how lenders and creditors review your credit health.

Let’s take a closer look.

Does income affect credit scores?

Your income doesn’t have a direct impact on your credit scores. When you review your credit reports, you’ll see that there’s no mention of income. Instead, your credit reports will show your payment history, current debts, your location and your employer. And if you’ve been involved in any lawsuits, arrests or bankruptcies, those may be listed too. 

Salary vs. income

It’s important to understand the difference between income and salary — they’re not quite the same thing. Your salary is the money you earn from working. Your income, on the other hand, includes your salary but also other sources of money you may receive such as Social Security, unemployment, alimony or retirement distributions. 

How your income may indirectly affect credit health

The money you bring in each month could play an indirect role in your overall credit health. Here are a few ways how:

Debt-to-income ratio

Your debt-to-income ratio is a calculation of all your monthly debt payments divided by your gross monthly income. Lenders use this ratio to help figure out if you earn enough each month to cover paying back the money you want to borrow, whether it’s in the form of a loan, mortgage or credit card payment. 

If your debt-to-income ratio is high, this could be a red flag to lenders, and you might have trouble getting approved for new credit. Creditors may feel that you’re already stretched so thin with your existing debt that you won’t have enough cash to cover a new payment. 

If you’re a homeowner, a good rule of thumb is to keep your debt-to-income ratio under 36%, including your mortgage payment. Renters should consider maintaining their debt-to-income ratio much lower — at about 15% to 20%, not including rent. If your debt-to-income ratio is above those benchmarks, you might want to look into ways you can tighten up your budget

Ability to pay bills

The amount of money you bring in each week or month — whether from a salary or other income — can directly affect your ability to pay bills, including your rent or mortgage, utilities or car payment. 

If you lose some or all of your expected income, it might be hard to keep up with all of your bills. But take note: Late payments may be reported to the credit bureaus by your lender, which could lower your credit scores.

Access to credit and loans

People with higher credit scores tend to lock in lower rates, which could help save money on interest in the long run. But in addition to credit history, some lenders may look at other factors to determine risk, such as your employment history and proof of income. 

What makes up credit scores?

Credit scores are calculated using information found on your credit reports, including your history of repaying debts on time, how long you’ve had a loan or line of credit and the total amount of debt that you owe. 

The most widely used credit scores by lenders are FICO® scores. Most credit scores fall between 300 and 850. A higher score generally makes it easier to get approved for a loan or credit card and secure lower interest rates.

What information is on a credit report?

A typical credit report usually will include your name, address and date of birth, along with the following information about your credit history:

  • Your accounts — This includes both open and closed accounts such as credit cards, mortgages and other types of loans such as auto, personal or student loans. It also includes the length of time you’ve had each account open.
  • Payment history — Creditors and lenders typically report to the credit bureaus whether you’ve paid your bills on time. Late payments and accounts in collections are reported. And if you’ve filed for bankruptcy, that could show up too.
  • Available credit — Your reports will also show how much credit you’re currently using. If your credit cards are maxed out, this could affect your overall credit scores.
  • New credit applications — Any time you apply for credit, this will show up as a hard inquiry on your credit reports.

What doesn’t show up on a credit report?

Like income, there are some other factors that won’t appear on your credit reports. These include your race, gender, marital status, nationality and whether you’re receiving any kind of public assistance.

You also probably won’t see any of your bank transactions listed or certain types of bills, including rent, mobile phone or cable TV.

What’s next?

If you’re concerned about how your income could affect your ability to get approved for loans and credit cards or land competitive rates, there are some things you can do to help increase your chances.

Consider applying for credit with a co-signer, sticking to a monthly budget and continuing to build healthy credit habits.

It’s also a good idea to check your credit reports on a regular basis and look for errors. If you notice something isn’t right, dispute the inaccurate info right away — it may be hurting your credit scores.

Looking to build your credit? Consider a credit builder loan.

Taking out a credit builder loan can help you build your credit by giving you the opportunity to show you can make regular on-time payments, which is an important part of your credit scores. 

When you get a credit builder loan, the lender typically puts the money you’ve borrowed into a reserve account it controls. You then make regular payments toward the loan, building a positive payment history that’s reported to the credit bureaus. When the loan is paid off (or you reach a certain threshold), the lender gives you access to the funds. 

Loan fees, interest and repayment terms vary among lenders, so you’ll want to compare your options before applying.

You might also want to consider Credit Karma’s Credit Builder plan, which can help you build low credit while you save.

About the author: Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt Un… Read more.