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Your income has no direct bearing on your credit scores, but a sudden loss or reduction in earnings could hurt your credit scores indirectly if it hinders your ability to pay your bills.
Credit scores are based on data collected in your credit reports at the national credit bureaus (Experian, TransUnion and Equifax). Information in your credit reports includes your history of borrowing money, in the form of loans and credit card accounts, and your history of repaying those debts.
The records in your credit reports are extensive and detailed, but there is a great deal of personal information that is left out of your credit reports (and therefore cannot be considered when calculating your credit scores). Among the things your credit report does not include:
- Income
- Marital status
- Employment status
- Race or ethnicity
- Religious affiliation
Excluding these personal details from credit reports and scoring systems helps to eliminate potential for bias among lenders or others who may view your credit reports.
What Can Affect Your Credit Score?
When working toward building up your credit score, of course it's more important to understand what does affect your credit score than what does not. Different credit scoring systems calculate scores differently, but all look for patterns of behavior that reflect responsible credit management habits. FICO, creator of the FICO® Score☉ , lists the following as the most important factors that affect credit scores:
- Bill payment history: Whether you're paying your debts on time as agreed is the single most important factor in determining your credit score. Timely payments promote score improvement over time, and even one missed payment will have a negative impact on your score. Payment history accounts for 35% of your FICO® Score.
- Credit card balances: Your credit utilization ratio measures your total credit card debt relative to your total credit limit, on both an individual card basis as well as overall. It's almost always represented as a percentage, and as it climbs above 30%, it will have a negative effect on credit scores. Credit utilization accounts for 30% of your FICO® Score.
- Length of credit history: The number of years you've held and managed debt makes up 15% of your FICO® Score. As long as you avoid missing payments and more serious credit missteps such as bankruptcy or foreclosure, your credit score will tend to increase as your credit history grows.
- Credit mix: Credit scoring systems tend to favor credit histories that reflect a diverse portfolio of credit accounts, including a combination of installment loans (such as auto loans, student loans and mortgages) and revolving credit accounts (such as credit cards). Credit mix accounts for 10% of your FICO® Score.
- New credit and recent applications: The number of credit accounts you've recently opened, as well as the number of hard inquiries that may have resulted from applications for credit, accounts for 10% of your FICO® Score. Too many new accounts or inquiries can hurt your credit score.
How Your Income Can Indirectly Affect Your Score
Since timely bill payments are so important to scoring models, it should be fairly easy to understand how loss of income can end up hurting your credit scores. If your income drops significantly due to unemployment, illness or other factors and you lack sufficient funds to pay your debt and credit payments, your credit score could be at risk. If you make payments late, miss them altogether or default on a debt, your credit score will surely suffer.
How Your Income and Debt Can Impact Getting Approved for Credit
While low or reduced income does not influence your credit score, there are other ways it can affect your ability to qualify for loans or credit.
Even if your credit score qualifies you for consideration for a particular loan or credit card offer, many lenders require proof of income, in the form of a pay stub or tax return, as part of their application process.
In addition, lenders typically consider the percentage of your monthly income (before taxes and other withholding) that you spend on debt payments—a measurement known as debt-to-income (DTI) ratio—when evaluating mortgage applications. Typically, to qualify for a mortgage loan, your DTI ratio should be no greater than 43%, and many lenders require DTI ratios of 36% or less.
Income isn't tracked in your credit reports, so it cannot influence your credit scores. To the extent a steady income enables you to keep up with your debt payments and to use credit responsibly, income is important to building and maintaining healthy credit scores.