How Your Income Affects Your Credit Score

How Your Income Affects Your Credit Score

At face value, it would seem only logical your income would have a direct bearing on your credit score. However, if you ask the folks at the credit-reporting agency Experian how your income affects your credit score they’ll tell you it doesn’t.

From their perspective, a person’s income is not part of their credit report, nor is it considered by credit scoring systems. Further, they assert that having a lot of money doesn’t guarantee a person will pay their debts. Instead, they prefer to consider an individual’s track record when it comes to handling debt.

However, that’s just part of the picture.

Here’s the rest of it.

Factors Determining Your Credit Score

The scoring algorithm developed by the Fair Isaac Corporation (FICO) calculates its findings based upon the following:

• Whether you’ve borrowed money in the past, and how long you’ve been borrowing
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• If you’ve always repaid your loans as agreed
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• Your missed payments on loans
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• How often you use credit and the types you employ
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• Existence of bankruptcies and/or legal judgments against you from creditors
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• Number of recent loan applications
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• Changes in any of the above factors

Factors Determining Your Suitability for a Loan

Lenders request access to your income information along with your credit score. They use it to measure your income against your obligations to determine your debt-to-income ratio.

You’ll likely receive a favorable response if you appear to have more than enough income to service your current debts and make the payments on the loan you’re requesting.

Thus, while your income can be said to be of little direct consequence when it comes to calculating your credit score, it can in fact have an effect upon it. For example, if you have a loan application denied because of insufficient income, your credit score will take a hit because you applied for the loan.

Yes, it can be argued that submitting the application was going to diminish your score just the same. However, in this instance you were turned down because of your income and your score was lowered. This means it could be more difficult for you to get approved by someone else.

So your income did affect your credit score in this case.

Resolving the Income Issue

There are a number of steps you can take If you learn you were denied a loan because your debt-to-income ratio is too high.

The most obvious one is to earn more cash so you can realign the ratio. However, you can also pay your debts down so the ratio is more in line with what the lender prefers to see.

Another thing you can do is make a large down payment on the item you’re trying to purchase. This will make the amount of the loan you’ll need smaller, which could position your ratio more favorably.

If you’re having trouble doing any of the above, you could consider holding off on the purchase and working with a debt relief company to get a better handle on your major debts. If you choose to go this route, look for information like these Freedom Debt Relief reviews to get a feel for the reputation of the company with which you’re considering working, and to learn more about how the process works.

Income and Credit Go Hand in Hand

When it comes to the question of how your income affects your credit score; while your income is excluded as a factor by reporting agencies, it’s definitely considered by lenders. As a result, your income can have a direct effect upon your credit worthiness and — by extension — your credit score.

Their relationship might be a secret, but they do walk hand in hand.