One common credit card question: Does your salary and income impact your credit score? You may be glad to know it doesn't. The size of your paycheck does not influence whether you have a good or bad credit score.
"Income isn't considered in credit scoring systems," John Ulzheimer, formerly of FICO and Equifax, tells CNBC Select.
"Income isn't even on your credit reports so it cannot be considered in credit scores because credit scores only consider what's on your credit reports," Ulzheimer explains. "In fact, no wealth metrics are factored into your credit scores."
That means your debt-to-income ratio and net worth also don't impact your credit score.
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What impacts your credit score?
Income doesn't affect your credit score, but it's still important to know the five main factors of a FICO credit score, which is the most common credit score used by lenders.
- Payment history (35%): Whether you've paid past credit accounts on time is the most important factor of your credit score.
- Amounts owed (30%): The total amount of credit and loans you're using compared to your total credit limit, also known as your utilization rate.
- Length of credit history (15%): The length of time you've had credit.
- New credit (10%): How often you apply for and open new accounts.
- Credit mix (10%): The variety of credit products you have, including credit cards, installment loans, finance company accounts, mortgage loans and so on.
Do lenders consider your income?
While income doesn't affect your credit score, Ulzheimer adds a disclaimer: "That certainly doesn't mean income and wealth aren't considered by lenders." After all, when you fill out a credit card application, you will be asked to enter your income.
When lenders review your eligibility for credit, he explains, they typically measure two things: Your ability to pay your bills (also known as capacity) and whether you pay your bills (also known as credit risk).
Income is considered a measurement of your capacity, not credit risk. While income doesn't have a direct impact on your credit score, it can have an indirect impact since you need to have sufficient income to pay your bills. And if you don't make enough money to cover your bills, you can rack up debt or miss payments, which can negatively impact your credit score.
The size of your income doesn't necessarily affect your credit limit, and having a high salary doesn't guarantee a higher line of credit. However, if you update your income with a card issuer to a higher amount, you may see an increase in your credit limit, which could be positive for your credit utilization ratio. Also, some cards, like the American Express® Gold Card, have no preset spending limit, which means they don't assign a credit limit. Terms apply.
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It's fascinating how income and credit scores intersect—or, more accurately, how they don't. The belief that a higher salary equates to a better credit score is a common misconception. Drawing on my expertise, let's delve into the intricate details:
1. Credit Score Calculation:
- Income isn't part of credit scoring algorithms. As John Ulzheimer, an expert from FICO and Equifax, highlights, credit scores solely rely on credit reports.
- Five key factors significantly influence a FICO credit score:
- Payment history (35%): Timely payments are paramount.
- Amounts owed (30%): Utilization ratio matters—the total credit used versus the available limit.
- Length of credit history (15%): Longer credit history tends to be favorable.
- New credit (10%): Frequent new credit applications can impact negatively.
- Credit mix (10%): Diversity in credit accounts is beneficial.
2. Income and Lender Consideration:
- While income doesn't impact credit scores, lenders do consider it in evaluating eligibility for credit.
- Your income reflects your capacity to pay bills, not your credit risk.
- Adequate income is necessary to manage debts and avoid missed payments, indirectly affecting credit scores.
3. Income's Influence on Credit Limits:
- Income doesn't directly dictate credit limits, but updating your income with a card issuer might affect the limit.
- Certain cards, like the American Express® Gold Card, don't have preset spending limits, yet they do evaluate income when extending credit.
4. Credit Education:
- Understanding credit scores, checking them for free, and assessing the likelihood of credit card approval without affecting scores are essential skills.
It's crucial to clarify that while income isn't a credit score determinant, it plays a significant role in financial health and in a lender's evaluation process. Ultimately, maintaining a balanced credit utilization ratio, making timely payments, and managing debts are pivotal for a healthy credit profile.
The intricacies of credit scoring and income's role can be quite nuanced. Feel free to ask if there's anything specific you'd like to explore further!
