How Income Affects your Credit Score
Your credit score and your 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 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 Credit Score is a traditional score often used for home and auto loans, and VantageScores are also popular with lenders. It’s possible that other credit scoring models 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.
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:
- If you have borrowed money in the past, and how long you’ve been borrowing
- If you have repaid your loans as agreed
- If you’ve missed payments on your loans in the past
- How you’re currently using debt (how much you’re borrowing, and what types of debt you use, for example)
- If any public records about you exist (things like bankruptcy or legal judgments against you from a creditor)
- If you’ve recently applied for loans, or there have been major changes in any of the above
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.
In addition to evaluating your credit, lenders want to know about your income. They may 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.
Debt to Income Ratio
- 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 any potential payments required on new loans. In general, you’re in decent shape if your debt to income ratios are below 28% to 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. But those scores are customized and can vary from lender to lender. Your FICO credit score, which is a standard score often used for loans like home and auto loans, is more or less the same no matter where you go (with some variations). Lenders can ask for additional information on an application (or get the data another way), which goes into their scoring modes.
As you can see, your income is an important factor in getting approved for a loan. Technically it’s not part of your standard credit score, but that might not matter if your main concern is getting approved.
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 loan payment. 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.
Consumer Financial Protection Bureau. "Buying a Home? the First Step Is to Check Your Credit," Accessed Oct. 8, 2019.
Federal Trade Commission. "Credit Scores," Accessed Oct. 8, 2019.
Consumer Financial Protection Bureau. "What Is the Ability-To-Repay Rule? Why Is It Important to Me?" Accessed Oct. 8, 2019.
Consumer Financial Protection Bureau. "What Is a Debt-To-Income Ratio? Why Is the 43% Debt-To-Income Ratio Important?" Accessed Oct. 8, 2019.
Federal Trade Commission. "Your Credit History," Accessed Oct. 8, 2019.