How Income Affects Your Credit Scores
Your credit score is important for getting a loan, so you can assume that your income is part of your credit score. After all, higher pay means more money available each month to repay those loans.
Does my income affect standard vouchers?
Your income does not directly affect your credit score, but it does affect your ability to approve. Credit approval is based on several factors, including your earnings and your credit score, but these are separate pieces of the puzzle.
Credit scores try to predict how likely you are to pay off the loan, and they use historical data (behavioral information) to do so. To generate a credit score, a computer program goes through your credit reports looking for information like:
- If you have lent money in the past and how long have you been lending
- If you repaid your loans as agreed
- If you missed payments on your loans
- How you currently use your debt (how much you owe and what types of debt you use)
- If there are any public records about you (such as bankruptcy or legal judgment against you by the creditor)
- If you have recently applied for a loan, or there have been major changes to any of the above
Ratings information is available from credit bureaus, and is generally provided by lenders that you have lent in the past (or by lenders to whom we currently lend). The data also comes from collecting agencies and public records databases.
In addition to looking at your credit, lenders want to know about your income. They ask this on most loan applications, and insufficient income is sometimes used as a justification for refusing a loan application.
Loans – but not credit models – Use information about your earnings in several different ways.
Debt to income ratio: Lenders want to know that you can afford to repay new loans. In some cases, the law requires them to document your ability to repay. One way they do this is by calculating the debt-to-income ratio. Your relationship looks at your monthly income compared to all your debt payments – and any potential payments needed for new loans. In general, you are in an acquired position if your debts and income are below 28% to 31%.
Scoring Models: Some lenders have their own models for evaluating your credit, but these models are different from your credit score. Your income is one of the factors used in these models. But those ratings are adjusted and vary from lender to lender. Your FICO credit score, which is the standard score often used for loans such as home and car loans, is more or less the same no matter where you are. Lenders may request other types of application information (or otherwise obtain information), which goes into their scoring regimes.
As you can see, your income is an important factor in getting a loan approval. Technically, it’s not part of the standard credit score, but it may not matter if your main concern is approved.
Not enough income?
If you don’t have enough income to get approved for a loan, you have several options:
- Pay off debt so they require minimum payments are no longer part of your debt-to-income ratio
- Increase your income by either earning more or adding cosigners to your application (their income will also be taken into account, but this is risky for your cosigner)
- Make a bigger contribution so that your loan payments will be less