Does your income affect your credit score?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

No, your income doesn’t directly impact your credit score. But your income does play a role in the loan approval process, so you should understand why your income matters to help you prepare for your next loan application. 

What affects your credit score?

Your credit score is based on your credit report. So, naturally, only the things on your credit report can—and should—affect your credit score. And income isn’t one of the things included on a credit report. Other factors, such as your marital status, race, employment status and how much you have in savings, also aren’t included in your credit report. Your credit report is only supposed to summarize your past behavior when borrowing credit, so factors like income and savings aren’t applicable.  

The credit bureaus collect consumer data from lenders and creditors. This data is run through a credit scoring model, such as the FICO^® or VantageScore^® models, to give each individual a credit score. Your credit score tells creditors how risky you are as a borrower based on your past patterns with other lenders. The higher your credit score, the more reliable a borrower you probably are. 

So, if your credit score doesn’t look at income, what exactly does it look at? Your credit score is made up of five factors that are weighted differently in importance:

• Payment history (35 percent): Your payment history is a record of whether payments are made on time and in full. This is the most significant factor in your credit score, so making even one late payment or missing a payment can drop your score by several points. On the other hand, a good track record of paying lenders on time can improve your overall credit.
• Amounts owed (30 percent): Amounts owed represents your credit usage, also known as your credit utilization ratio. This ratio is the amount of credit available to you versus the amount you spend every month. If you have a single credit card with a limit of $10,000 and spend $1,500 monthly, your ratio is 15 percent. A credit utilization above 30 percent is more likely to negatively affect your credit score.
• Credit history length (15 percent): Your credit age is the average age of all your credit accounts. This will naturally improve with time as your accounts get older. However, you can keep your credit age as high as possible by not closing your oldest account.
• Credit mix (10 percent): Your credit mix is all the different types of credit that make up your profile. Having a diverse credit portfolio shows that you can be responsible with all sorts of lenders. A combination of installment loans (car loans, student loans, mortgage) and revolving accounts (credit cards) is optimal.
• New credit (10 percent): The number of new credit accounts you’ve opened recently—and the associated hard inquiries—can impact your score. It’s not recommended that you open several new accounts in a short period, as it can hurt your credit even more.

Your income can indirectly affect your credit score

As we’ve illustrated, your income isn’t one of the factors considered for your credit score.  But your income can impact your ability to make your payments on time and in full, and payment history is the largest factor of your credit score. 

But perhaps more importantly, your income will typically have a direct effect on your loan approval odds. For example, when applying for a mortgage, both your income and credit score will be used to evaluate you as a borrower. How much you make combined with your credit score will determine how much you’re approved to borrow and at what loan terms. 

Lenders often ask you to list your income on loan applications so they can understand how much you can afford to borrow. If you don’t have enough income to pay for or handle the credit you’re applying for, that can prevent you from being approved. 

Calculating your debt-to-income ratio

Your debt-to-income (DTI) ratio will be examined when you apply for credit and will play a role in your approval or denial. The debt-to-income ratio is how much of your income goes to debt versus how much you have left over. So, if you have a monthly income of $4,000 and spend $1,200 on your monthly bills, your debt-to-income ratio is 30 percent. 

If your debt-to-income ratio is very high, it indicates that you probably don’t have the income room to take on new, additional debt. Generally speaking, lenders want to see a debt-to-income ratio of less than 36 percent to give approval for new credit or loans, with a DTI maximum of 43 percent for mortgages.

Note that it’s your income—not your salary—used in the DTI ratio. Your salary is the annual amount of money you receive from an employer. In comparison, your income includes your salary and any additional monetary sources, such as rental payments, stock profits, alimony and more. Income is the criteria used when you’re applying for a loan or credit product because all these additional sources of revenue can help you pay your debts. 

Ways to improve your DTI

If your DTI is higher than you’d like it to be, there are two main ways to reduce it. The first is to increase your income. You may want to apply for a new job or start a side hustle to bring in extra money.

The second way is to reduce the amount of debt you owe. If you lower your balance, you’ll also lower your minimum monthly payments, giving you more wiggle room in your budget. For example, if you currently have $2,000 in minimum monthly payments, you may be able to get that down to $1,400 or $1,500.

If you start out with $2,000 in payments and $4,500 in income, your DTI is 44.4 percent. Now, look at what happens when you increase your income to $6,000 per month. Your DTI drops to 33.3 percent, which is much more manageable.

How to improve your overall credit

Now that you understand the factors included in your credit scores, here are some tips to help you improve your overall credit:

• Make on-time payments.
• Pay your credit card balances in full every month, if possible.
• Pay more than the minimum due on your credit card accounts.
• Avoid applying for credit you don’t need.
• Don’t purchase items you can’t afford to pay for in cash.

If you have strong credit and a healthy DTI, it’s entirely possible to qualify for a good loan with excellent terms on a modest income.  Are you new to managing your credit? It may be helpful to get professional advice before you make any important decisions. Sign up for a free credit assessment from Lexington Law to get recommendations tailored to your current financial situation.

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