You’re making debt payments on time each month, monitoring (and limiting) hard inquiries, and maybe even lowering your credit utilization ratio. Give yourself a pat on the back – increasing your credit score can be hard work! But did you know there could be some factors – like your income – that can be limiting you from reaching the high scores you’re aiming for?
While your annual income doesn’t directly impact your credit score, it does play a role in it indirectly. How, exactly? The answer isn’t clearly in black and white. Read on to learn more as we break down the gray areas for you.
Does Income Impact Your Credit Score?
The answer to this common question is: no, not really. That’s because, when it comes to your annual salary and income, credit bureaus disregard those numbers entirely when weighing your credit score. Instead, they rely on other factors, like:
- Payment History – Frequency of on-time payments, as well as delinquent accounts and anything sent to collections.
- Debt Utilization Ratio – How much you owe to your creditors – including credit cards, auto loans, mortgages, and personal loans – divided by the total amount available for you to borrow.
- Length of Credit History – The amount of time (in years) that you’ve had established credit, the higher your score.
- Types of Credit – Having a range of credit, from credit cards to mortgages, shows lenders you know how to manage various types of debt responsibly, meaning a healthy mix makes you appear as less of a risk.
- New Credit Inquiries – While one or two hard credit inquiries per year won’t significantly impact your score, anything more can drop your ranking.
How do different credit bureaus compute your credit score? Read this to find out.
That being said, while you can still strive for excellent credit with a lower salary, your annual income does play a factor when you apply for a home, loan, or even credit card.
How Income Impacts Your Credit Score
To determine whether you have the ability to repay what you borrow, lenders take a look at your annual income to factor your debt-to-income ratio (DTI). Your DTI measures your pretax income in comparison to the total amount of debt you pay out monthly (credit card bills, mortgages, loans, etc.). In order to be approved for a mortgage, for example, your DTI is recommended to be 30% or under.
So, while your DTI does not directly impact your credit score, lenders will take it into high consideration before extending any further credit to an individual with a high ratio, since they’re considered a risk when it comes to being able to pay back their debts in full. In turn, the lower your income, the harder it will be to qualify for lines of credit and loans.
Ways To Improve Your Score with a Lower Income
The best way to focus on improving your score while earning a lower income is to focus on reducing your DTI, which can be done a few ways:
- Pay down your debts as much as possible (in full, if you can), and try a strategy like the snowball or avalanche method to pay off high-interest loans faster. The more debt you can eliminate, the higher your DTI.
- Increase your income, either through a part-time job or side gig. The more money you take in, the higher you raise the income portion of your DTI ratio.
- Add a cosigner whose income is equal to or higher than yours to loan applications to increase your likelihood of approval.
With a bit of patience and persistence, you’ll be able to make your way toward an excellent credit score, while lowering your DTI ratio to increase your approval odds for a new loan or line of credit – regardless of your income.
The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, we advise you to consult with a licensed advisor.
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