An applicant’s credit score is an essential factor in determining eligibility for new lines of credit. But how important is income in that same formula? Does your monthly income impact your credit score and play a role in getting approved for new credit?
What Impact Does Your Income Have on Your Credit Score?
First, the answer to this important bit of information: your income will not directly impact your credit score. Your credit score comprises a variety of information, but it does not factor in your income.
While income does not impact credit scores, it plays a vital role in getting approved for loans, including some credit cards.
How Does Income Affect Your Ability to Get Approved for Credit?
Most lenders rely on more than your credit score before approving a loan application. Credit card applications generally include a question asking applicants their annual income, for instance. These applications may also ask for the value of investments, annuities, or other sources of income.
Lenders ask for this information to gauge an applicant’s ability to repay any new credit. In fact, the Consumer Finance Protection Bureau (CFPB) requires lenders to know this information, through their “Ability-to-Repay Rule.”
The Ability-to-Repay Rule looks at the “debt-to-income ratio” of a potential borrower. The debt-to-income ratio refers to the amount of monthly income a person receives compared to the amount of debt they hold. Having a debt-to-income ratio of around 40% or lower is a good sign that an applicant is not stretched too thin financially.
What Happens If Your Income Isn’t High Enough for New Credit?
When a bank or other lender decides an applicant does not have enough income to meet the potential payments on a new line of credit, their application is denied. Possible given reasons include:
- Income is too low
- Credit card balances are too high
- Loan balances are too high
If your credit card or loan application is denied because your income is too low or your debt to income ratio is too high, what can you do?
Paying down existing debts is one of the most basic ways to increase your credit approval odds in the future. Eliminating a portion of your current credit card debt can reduce your monthly payments and improve your debt-to-income ratio.
If you need additional credit, you can also consider adding a co-signer to your application. A co-signer is an individual who acts as a guarantor for the credit account. This status means that if you miss payments on the account, the co-signer is held liable for the money. Only use a co-signer if you plan to use your new credit responsibly and make all your payments on time.
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