The credit report has many inner workings and complexities. You should always be learning as much as you can about how to improve your credit score. One of the questions we hear often is whether or not your income shows up on your credit report. It in fact does not. Salaries actually did show on credit reports up until the early 1990’s, but around that time they decided to change the credit model.
Despite the fact that your income does not show on your credit report, when a lender is offering you a credit card or credit limit increase they are required to consider your income. This is either provided by you or estimated by the lender. While this is a factor, their decision is primarily based on your past credit habits and your overall credit worthiness.
Why does my income not appear on my credit report?
One of the main reasons that salaries no longer appear on your credit report is because they have always been self-reported. This allows for the numbers to be very unreliable because people will generally want to inflate their numbers to seem more credit worthy.
The primary reason that your income does not affect your credit score is because it would be improper and incorrect to allow people better credit scores due simply to making more money. For example, a doctor with a high income may be really poor with managing his money or is an excessive spender and would therefore be a higher risk than the entry-level employee who has few bills and is very budget-conscious. If credit worthiness was based on income alone, you can see that there would be major issues.
Income is a wealth metrics that show your ability to pay bills. Credit shows your intentions and actual results. You could make a lot of money and never pay your bills on time, so a credit report shows that you are good at handling your debts and obligations.
How is my income information used then?
While your income is not used to determine you credit score and it is not used to determine overall credit worthiness, it is a very important factor that lenders look at when extending borrowers a credit line or loan.
Lenders will ask for your income on the application and will evaluate all of your current debts. They will look at your credit report to see how diligent you are about paying your debts, and will consider the amount of money that you are asking for. If your income and credit report paint a picture of you that looks like a low risk for the lender, they will extend you the credit you requested.
However, if your income is too low or your request is for too much money or your credit report paints you in a bad light, the lender may very well decline your application. Millions of people every year get applications declined due to their income being too low.
The lenders look at something called the “debt to income ratio.”
What is the debt to income ratio?
Debt to income ratio is “the amount of debt you have as compared to your overall income.”
Add up all of your monthly debts, which may also be known as recurring debts. This includes the following:
- Home equity loan payments
- Car loans
- Student loans
- Minimum monthly payments on credit cards
- Any other loans you may have
After adding all of these up, you would take your recurring monthly debt and divide by your gross monthly income to find your debt to income ratio.
You pay $5,000 in recurring monthly debt, and you take home a gross monthly income of $10,000
$5,000 / $10,000 = 50%
Your debt to income ratio is equal to 50%.
What is a good debt to income ratio?
Lenders generally want to see a debt to income ratio under 30% in order for them to extend you credit or loans at the best rates.
What can I do if my debt to income ratio is too high?
- Pay off your debts
- The most obvious answer to this question is to pay off your debts as quickly as possible so that the monthly payments decrease and your overall debt obligations decrease.
- Increase your income Earn more money or add a cosigner to your application. The cosigner’s income will also be considered so that will make your income pool larger which will lower your overall debt to income ratio. Keep in mind that this can be a risky proposition for the person cosigning, because they are now responsible for your debts if you fail to pay.
- Make payments toward the principals If you make payments directly towards your principal, in some cases you will be able to lower your monthly payments on a loan. This will also lower your debt to income ration, because your monthly obligations will decrease.
How can I increase my income?
Below is a list of simple ways you can increase your income. This is not exhaustive, but is just in place to give you some fresh ideas and get your creative juices flowing.
- If you are employed, ask for a raise or a promotion
- Tutor students on the weekend
- Start cooking your meals at home, and taking lunches to work
- Work as a freelancer and make extra money
- Work as a freelance writer, virtual assistant or learn a skill
- If you know a second language, become a translator
- Translation services are expensive, so you can make great money doing this on the side
- Drive for Uber or Lyft
- Focus on cutting expenses down
- Evaluate all of your monthly bills and find ways to save money by shopping around for lower insurance premiums, lower cell phone bills, etc
- Become a cable cutter
- Do you really need to pay for expensive cable, or can you get by with just a Netflix subscription? This could save you $100+ every month!
Income is not on your credit report, but it does help you get credit
Though your income does not show up on your credit report, your income is a critical factor that lenders evaluate when looking at your credit or loan application. The key takeaway here is to keep your debt to income ratio down by lowering your expenses and raising your income. Start focusing on these two steps today and you are on your way to getting approved on that next application!