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Does Income Impact Your Credit Score? Not Really, but it’s Complicated

Does Income Impact Your Credit Score? Not Really, but it’s Complicated

*Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.

This article was last updated Jul 22, 2014, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.

One of the most common credit questions is "does income affect credit?". The short answer is that no – your income does not impact your credit score. Credit rating agencies closely guard their formulas for coming up with credit score numbers, but they would have to ask what your income is in order to know it, which they don’t. Take a look at what else doesn’t make up your credit score.

A deeper look at the question reveals that income does play a role – and usually a very significant one – when it comes to credit card approvals and your ability to borrow money. In other words, although your is not a factor in calculatoring your credit score, banks do take a look how much money you make before extending credit to you. If you apply for a mortgage, for instance, you will likely be asked to submit two years of recent IRS tax returns to verify your income.

Credit Scores and Income

Salary information has not been collected and used by major scoring agencies like FICO for more than 20 years. You might wonder why they do not use it, but the answer is quite simple; the credit agency would have to ask the consumer, and their responses are usually inflated. Some consumers will even flat-out lie in order to make themselves look more affluent and credit worthy, and that is why the mortgage industry finally did away with so-called “liar loans.”

“Liar Loans” were mortgages that required very little documentation. Instead of requiring copies of your tax returns the lender on a so-called “no documentation” loan application would simply ask you to fill in your income. Despite risking penalties for misrepresenting the facts on a mortgage application, which can be construed as fraud, lots of borrowers just wrote down whatever they felt would secure them with a loan. That kind of honor system is not reliable for calculating credit scores.

Credit Card Company Calculations

Just as other kinds of lenders ask for and incorporate income into their approval process; credit card companies follow a similar policy. One rep with Capital One, for example, told me they take into consideration whether the applicant has at least $425 in “free income,” which excludes the cost of rent or a mortgage in determining whether or not to approve a new card member.

Card companies then find themselves short on data and it is common for them to ask for it in order to maintain fresh, current income records on each of their customers. If your credit score is stable, for instance, but your income drops off significantly then a credit card company will protect itself by not raising your credit line. Some card companies have even been known to lower your credit limit without notice or even cancel your account.

Requests for Updated Income Verification

Since credit card companies can’t acquire your income information through the credit reporting agencies, they may ask you to share that information with them from time to time. Usually the request is worded in such a way that may be interpreted by the consumer as a “mandatory” request. I’ve seen notices, for example, that said things like “The federal government requires us to make the effort to obtain current income information on our customers.”

That just means that the government regulators expect credit card companies to try to gather that data, a step that was taken after the last financial crisis. The CARD Act says that credit card companies have to do a better job of trying to verify the repayment ability of borrowers, especially for minors, and knowing how much income someone makes is part of that process.

An Example of the Small Print

It does not mean, however, that consumers have any obligation to provide it. The burden is on the banks and credit card companies, not you. If you don’t want to share your income information with a credit card company, then don’t.  It’s completely up to you.

I recently dug into the small print on Discover Card’s website and found these answers:

“Your income and housing information are among a variety of factors Discover uses to authorize some credit card transactions and extend the credit line you need, or determine eligibility for special offers such as credit line increases.”

“You are not obligated to share your income or housing information with us. Periodically we review your account to see if you're eligible for a credit line increase or in some instances we allow you to exceed your designated credit line at point of sale. Providing us with your updated information on an annual basis allows us to continue to service your account appropriately.”

“We rely on many different factors when it comes to making any change to your account. Neither your willingness to share your income and housing information, nor this information itself, would be a determining factor if your line of credit were decreased.”

Boosting Your Credit Rating

If your income increases and you voluntarily share that information with your credit card company, it could help you to receive preferential treatment. Your credit line might be increased, for instance, and you might qualify for a more prestigious card of theirs or for a lower interest rate. As explained before, however, you have no legal obligation to share this kind of information.

When it comes to how your credit score is calculated, income may be irrelevant, but how good you are at paying your bills on time is crucial. The amount of available credit that you use – also known as your “credit utilization ratio,” is also a key factor. Additionally, avoid late payments and missed payments as those types of derogatory actions greatly affect your credit score.

*Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.

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