One common credit card question: Does your salary and income impact your credit score? You may be glad to know it doesn't. The size of your paycheck does not influence whether you have a good or bad credit score.
"Income isn't considered in credit scoring systems," John Ulzheimer, formerly of FICO and Equifax, tells CNBC Select.
"Income isn't even on your credit reports so it cannot be considered in credit scores because credit scores only consider what's on your credit reports," Ulzheimer explains. "In fact, no wealth metrics are factored into your credit scores."
That means your debt-to-income ratio and net worth also don't impact your credit score.
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What impacts your credit score?
Income doesn't affect your credit score, but it's still important to know the five main factors of a FICO credit score, which is the most common credit score used by lenders.
- Payment history (35%): Whether you've paid past credit accounts on time is the most important factor of your credit score.
- Amounts owed (30%): The total amount of credit and loans you're using compared to your total credit limit, also known as your utilization rate.
- Length of credit history (15%): The length of time you've had credit.
- New credit (10%): How often you apply for and open new accounts.
- Credit mix (10%): The variety of credit products you have, including credit cards, installment loans, finance company accounts, mortgage loans and so on.
Do lenders consider your income?
While income doesn't affect your credit score, Ulzheimer adds a disclaimer: "That certainly doesn't mean income and wealth aren't considered by lenders." After all, when you fill out a credit card application, you will be asked to enter your income.
When lenders review your eligibility for credit, he explains, they typically measure two things: Your ability to pay your bills (also known as capacity) and whether you pay your bills (also known as credit risk).
Income is considered a measurement of your capacity, not credit risk. While income doesn't have a direct impact on your credit score, it can have an indirect impact since you need to have sufficient income to pay your bills. And if you don't make enough money to cover your bills, you can rack up debt or miss payments, which can negatively impact your credit score.
The size of your income doesn't necessarily affect your credit limit, and having a high salary doesn't guarantee a higher line of credit. However, if you update your income with a card issuer to a higher amount, you may see an increase in your credit limit, which could be positive for your credit utilization ratio. Also, some cards, like the American Express® Gold Card, have no preset spending limit. The amount you can spend adapts based on factors such as your purchase, payment and credit history. Terms apply.
Want to learn more about credit scores? Here's how to understand and check your credit score for free and how to check your odds of getting approved for a credit card without hurting your credit score.
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