Your income doesn’t directly affect your credit score. Your salary isn’t listed anywhere on your credit report. The three credit bureaus in the United States and the Fair Isaac Corporation who created the FICO credit score don’t care how much money you earn from your job. But, your lenders sure do!
It’s hard to believe that the credit bureaus don’t care about your salary when they assign you a credit score. But, they don’t. Understanding what they do care about is the easiest way to boost your credit score and pay the lowest amount of interest for debt that your borrow.
Here’s what you need to know to get the highest credit score and subsequently the lowest interest rates on your debt.
What Makes Up a Credit Score?
According to the Fair Isaac Corporation, TransUnion, Equifax, and Experian, your credit score is calculated using five key statistics. The factors they look at are payment history, the amount owed, the length of credit history, the amount of new credit, and the types of credit you’ve used. Those are the only factors that go into the credit bureaus proprietary algorithms when they issue credit scores. You’ll notice that you can’t find your salary and work history anywhere on that list.
The Fair Isaac Corporation won’t tell exactly how they calculate your credit score. It’s a trade secret. But, they do share with consumers the characteristics they look at and how they weight them to calculate your FICO score. Thirty-five percent of your score is your past payment history of on-time repayment, 30% the total amount owed and credit utilization, 15% for the length of your credit history with individual borrowers, 10% new credit, and 10% for using different types of credit.
While FICO is the most popular credit score used by over 90% of all lenders, the other three credit bureaus have their own proprietary scores that are also utilized in the marketplace and have similar weightings to those same five factors.
The credit bureaus don’t care how much money you earn. Your income isn’t an indication that you will, in fact, repay money that you borrow. Those five characteristics are though. Your credit score is simply a number based on your past historical use of debt and how well you’ve repaid that debt. It’s a number that represents the likelihood that you’ll repay money that you borrow.
But, understanding these five essential characteristics helps you get the highest credit score. And, with a high credit score, lenders then offer you the lowest interest rates on your new debt that you apply to receive.
Your Salary Doesn’t Determine Your Credit Score
The characteristics the credit bureaus look for are relatively straightforward and simple. But, the most interesting aspect of your credit score is what the credit bureaus don’t use when computing your credit score.
One of the biggest myths is that the credit bureaus look at your employment when determining your credit score. That myth couldn’t be further from the truth. The credit bureaus don’t consider any employment history, both current and past when assigning you a credit score. Your salary, occupation, employer, job title, and employment length do not matter to the bureaus.
Surprising items not used in calculating your credit score:
- Employment history
- Job title
- How long your company has employed you
- How much money you have in the bank
- Whether you rent or own a house
- Criminal background
- Your future job prospects
- Education level
- How great a renter you are
- Your use of a debit card
- If you’re behind on your taxes
- Your age, sex, race, color, religion, national origin, or sexual orientation
- Your marital status
- Lenders Look at Employment History and Salary
Lenders, on the other hand, look at your salary and employment history with a fine tooth comb when you apply for a loan. Once upon a time, more than 20 years ago, income was included on credit reports. However, income information was very unreliable because the consumer provided it.
It became evident that reporting income on a credit report was a waste of time, which is why the credit bureaus systemically purged it more than two decades ago. Besides, there are other more reliable ways for lenders to verify your income such as requesting your pay stubs and W2s.
However, your income does not tell the lender whether you’re likely to make those payments in a timely fashion.
Income and credit scores tell two completely different stories about an applicant. One says whether you can afford to make your payments. The other shows whether you’ll choose to repay the loan.
If income were a factor then doctors and lawyers would all have the highest scores while hourly workers would have the lowest. That suggests that low-income people choose to miss payments and affluent individuals do not. Of course, we know this to be untrue as plenty of wealthy people mismanage their money too.
Why Credit Bureaus Don’t Use Income In Credit Reports
Even if your income were to appear on your credit reports, it’s highly likely that it wouldn’t be 100% correct.
Who knows exactly how much they’re going to make in any given year? Stock options, a new job, promotion, reduction or increase in hours worked, new compensation structure, second job, a layoff can throw off your income. None of these are predictable. So, really the best we can do is to tell a lender how much we think we make, which is likely not going to be correct.
Income does not equal credit risk. Income is a metric that is used by lenders to measure your capacity to repay. In other words, your income lets a bank know whether you can afford to make the monthly payments on the loan for which you’ve applied.
The Income Myth
The idea that income has an impact on your credit scores has become a rather stubborn myth that just won’t die. It’s so persistent because it makes sense. You make great money. So, you feel more comfortable borrowing because you have the ability to pay it back.
Yes, people who earn more money do have an easier time paying their monthly obligations, at least in theory. However, even the wealthy are capable of overextending themselves financially.
If you spend more money than you earn, then at some point your credit scores are likely going to suffer the consequences of your poor money management.
The credit bureaus derive your credit score from the information that is contained in your credit report — nothing more and nothing less. Because income information is not listed on your credit reports, it’s impossible for income to be a factor used to calculate credit scores.