Your credit report has many complexities. That’s why people should always have to learn as much as possible about improving it. One of the questions we hear often is whether your income shows up on your credit report. Salaries actually were on credit reports until the early 1990s, but things changed. The latest credit reports don’t contain people’s income. Ok, but what that mean for you? Does it mean that lenders won’t check your income if it is not already on your credit report? They do. In fact, your income and debt to income ratio are significant factors that every lender pays attention to.
One of the main reasons this is because salaries are self-reported.
The main reason that your income does not affect your credit score is it could be misreported. For example, a doctor with a high income may be poor with managing his money or is an excessive spender and would be a higher risk than the entry-level employee who has few bills and is very budget-conscious. If creditworthiness 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 you are good at handling your debts and obligations.
These are different things that shouldn’t be confused.
While your income is not used to determine your credit score and is not used to determine your overall creditworthiness, it is a critical factor that lenders look at when extending borrowers a credit line or loan.
Lenders will ask for your income on the application to evaluate all of your current debts. They will look at your credit report to see how diligent you are about paying your debts and consider the amount of money you are asking for. The combination of both factors makes your actual credit risk.
Here are the 3 main factors: credit report, income, debt to income ratio. However, these days lenders rely on many additional factors.
However, if your income is too low or your lender finds too many loan or credit card requests, the lender will probably decline your application. Every year, millions of people get applications declined due to their low income.
Now, let’s talk a little bit about the debt to income ratio.
Your debt to income ratio is “the amount of debt you have compared to your overall income.”
To count it correctly, you should also add your monthly bills, which may also be known as recurring debts. This includes:
After adding all of these up, you would take your monthly debts. To find your debt to income ratio, you have to divide this number by your gross monthly income.
For example:
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?
Many lenders want to see a debt to income ratio under 30% to approve you for a credit card or loan. Some lenders allow it to be up to 50%. Some lenders don’t list a debt to income ratio restriction. However, this doesn’t mean that they won’t pay attention to it. In general, less is better.
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.
Earn more money or add a cosigner to your application. The cosigner’s income will also be considered, so 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 cosigner because they are now responsible for your debts if you fail to pay.
If you make payments directly towards your principal, you will be able to lower your monthly payments on a loan in some cases. This will also lower your debt to income ratio because your monthly obligations will decrease.
Below is a list of 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.
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!