It might not cross your mind that the amount of money in your accounts can affect your credit score. For more information on how your income can affect your credit scores, keep reading.
How Does Your Income Affect Your Credit Score?
Your income is the total amount you have, inclusive of your salary, if any. Although your income rate has no negative effect on your credit score directly, certain instances can affect your credit indirectly. For example, when credit reports are reviewed, there is usually no mention of the income rate affecting the credit. However, a steady income can help to achieve a good credit score.
The following factors are the ways your income can impact your credit scores:
1. Credit and Loans
If you want to apply for loans or a credit card, your credit score determines how much loan or credit you can get. Most lenders look into the income or salary history of the borrower. So, for a high credit score, information such as your payment history, total income, amount of debt owed and loan repayment are factored. Also, interest rates are lower if you have higher credit scores.
2. Debt-To-Income (DTI) Ratio
The debt-to-income ratio calculates your monthly debt payment divided by your gross monthly payment. The DTI percentage determines how you can repay or manage a loan. It is used to find out if you make enough income to repay the loan, credit payment, mortgage, auto loans, etc. A high debt-to-income ratio shows you might have difficulty repaying loans, leading to little or no loan approval. You can keep a low debt-to-income ratio by being financially responsible and repaying your loan debts on time.
3. Bill Payments
Your regular income determines how well you can pay your utility bills, loans, or rent. If you have no income, your bill payments can be affected, resulting in low credit scores. A bad credit score leads to no loan approvals, high interest, insurance rates, etc.
Ways To Positively Impact Your Credit Scores on a Low Income
If you are living on a low income, here are the various ways you can positively impact your credit scores.
1. Constant Bill Payment
Your ability to pay your bills is an essential factor in positively affecting your credit scores. When you avoid late or overdue payments of loans and bills, you can positively impact your credit. Important bills such as rent, mortgages, student loans and credit cards can help positively affect your credit scores.
Also, you can pay down payments on time to avoid carrying balances and increased interest rates.
2. Credit Monitoring
Monitoring your length of credit history repeatedly can prove effective in tracking your credit score and spending habits. In addition, credit monitoring helps you detect for possible fraud or inaccuracies.
In case of any inaccuracy, you should proceed to report at your bank or major credit bureaus. You may also file a dispute. In addition, services like MyScoreIQ offer credit monitoring plans to help you stay on top of your credit report and FICO® Scores.
3. Apply For a Credit Card
You can reach your credit score goals by applying for a credit card. A credit card application can helps your credit report by 10%. In addition, you can apply for different cards to help you increase your credit limit.
You may apply for more than one credit card to lower your credit utilization ratio and get more credit card rewards.
Note that you shouldn’t apply for too many credit cards within a short period as this can negatively affect your credit scores and shows the possibility of a financial problem.
4. Avoid Closing Old Credit Accounts
Instead of getting rid your old credit cards, try to use them occasionally, as this helps you with your credit history. When you close an old account, your credit scores can be negatively affected because you reduce your credit utilization ratio.
5. Be an Authorized User
If you are starting your credit report from scratch, you can ask a relative or close friend to add you as an authorized user. Being an authorized user on an account with a good credit score can positively impact your credit score and your credit record.
6. Learn to Save Money
If you’re working to save money, you should reduce your expenses and spend wisely. Doing this gives you enough money to repay your debts and pay your loans on time and work toward building savings.
Bottom Line on How Your Income Affects Your Credit Scores
Your income can affect your credit scores indirectly through factors such as payment of debts, loan approvals and debt-to-income ratio. However, you can work toward your credit goals if you have a regular flow of income and make good financial decisions.