Does Income Affect Credit Scores?

Your income doesn’t have a direct impact on your credit scores. When you review your credit reports, you’ll see that there’s no mention of income. Instead, your credit reports will show your payment history, current debts, your location and your employer. And if you’ve been involved in any lawsuits, arrests or bankruptcies, those may be listed too. 

Salary vs. income

It’s important to understand the difference between income and salary — they’re not quite the same thing. Your salary is the money you earn from working. Your income, on the other hand, includes your salary but also other sources of money you may receive such as Social Security, unemployment, alimony or retirement distributions. 

How your income may indirectly affect credit health

The money you bring in each month could play an indirect role in your overall credit health. Here are a few ways how:

• Debt-to-income ratio

Your debt-to-income ratio is a calculation of all your monthly debt payments divided by your gross monthly income. Lenders use this ratio to help figure out if you earn enough each month to cover paying back the money you want to borrow, whether it’s in the form of a loan, mortgage or credit card payment. If your debt-to-income ratio is high, this could be a red flag to lenders, and you might have trouble getting approved for new credit. Creditors may feel that you’re already stretched so thin with your existing debt that you won’t have enough cash to cover a new payment. If you’re a homeowner, a good rule of thumb is to keep your debt-to-income ratio under 36%, including your mortgage payment. Renters should consider maintaining their debt-to-income ratio much lower — at about 15% to 20%, not including rent. If your debt-to-income ratio is above those benchmarks, you might want to look into ways you can tighten up your budget. 

• Ability to pay bills

The amount of money you bring in each week or month — whether from a salary or other income — can directly affect your ability to pay bills, including your rent or mortgage, utilities or car payment. If you lose some or all of your expected income, it might be hard to keep up with all of your bills. But take note: Late payments may be reported to the credit bureaus by your lender, which could lower your credit scores.

• Access to credit and loans

People with higher credit scores tend to lock in lower rates, which could help save money on interest in the long run. But in addition to credit history, some lenders may look at other factors to determine risk, such as your employment history and proof of income. Source