How Income Affects Your Credit Score
Your credit score and income are both important for getting a loan, but lenders typically view these factors separately. That’s significant because people often assume that their income is part of their credit score. After all, a higher salary means more money is available each month to repay those loans, and that’s what lenders want.
Your income does not directly affect your credit score, but it does affect your ability to qualify for a loan. Lenders approve loans based on several factors, including your earnings and your credit score, but those are separate pieces of the puzzle.
When we refer to credit scores here, we’re talking about the most commonly used scores. Your FICO score is often used for home and auto loans. VantageScores are also popular with lenders. Other credit scoring models may use your income as part of your score, so it’s critical to understand who wants your score and what type of credit scores they use.
What Are Credit Scores?
Traditional credit scores try to predict how likely you are to repay a loan, and they use historical data about your borrowing behavior to do so. To generate a credit score, a computer program reads through data in your credit reports looking for information like:
- Whether you have borrowed money in the past, and how long you’ve been borrowing
- Whether you repaid your loans as agreed
- Whether you’ve missed payments on your loans in the past
- How you’re currently using debt, including how much you’re borrowing, and what types of debt you use
- Whether any public records about you exist, like bankruptcy or legal judgments against you from a creditor
- Whether you’ve recently applied for loans
Scoring models use information from credit bureaus, which store records that your current and past lenders supply to those credit agencies. Data may also come from collection agencies and public records databases.
Your Income and Credit
In addition to evaluating your credit, lenders want to know about your income. They ask how much you earn on most loan applications, and insufficient income is sometimes a justification for denying a loan application. Lenders—but not credit scoring models—use information about your earnings in several different ways.
Lenders want to know that you can afford to repay any new loans you’re applying for. In some cases, they’re required by law to document your ability to repay. One way they do that is to calculate a debt-to-income ratio. Your ratio looks at your monthly income compared to all of your debt payments and the potential payment on the loan you're applying for. In general, you’re in decent shape if your debt-to-income ratio is below 43%.
Some lenders have their own internal scoring models for evaluating your loan, but those models are different from a traditional credit score. Your income is one of the factors lenders include in those models. Those scores are customized and can vary from lender to lender. Lenders can ask for additional information on an application (or get the data another way), which goes into their scoring models.
Not Enough Income
Although your income isn’t part of a traditional credit score, it can still prevent you from getting approved. When you don’t have enough income to get approved for a loan, you’ve got several options:
- Pay off debt to eliminate or reduce your current debt payments. As a result, those required minimum payments are no longer part of your debt-to-income ratio.
- Increase your income, either by earning more or adding a cosigner to your application. With a cosigner, that person’s income adds to your own, but promising to repay your loan is risky for a cosigner.
- Make a bigger down payment so that your required payments on the loan will be smaller.
- While your income doesn't directly affect your credit score, it does play an important role when you apply for credit.
- You can improve your credit score by making payments on time and keeping your credit balances low.
- Lenders look at the relationship between your income and your debt payments.
- Earning more income and/or paying off debts improves your chances of being approved for a loan.
Experian. "The Difference Between VantageScore Scores and FICO Scores." Accessed Dec. 6, 2020.
Federal Trade Commission. "Credit Scores." Accessed Dec. 6, 2020.
Consumer Financial Protection Bureau. "What Is the Ability-To-Repay Rule? Why Is It Important to Me?" Accessed Dec. 6, 2020.
Consumer Financial Protection Bureau. "What Is a Debt-To-Income Ratio? Why Is the 43% Debt-To-Income Ratio Important?" Accessed Dec. 6, 2020.
Federal Trade Commission. "Your Credit History." Accessed Dec. 6, 2020.