You have a high income, so you must have a high credit score, right? It’s a common misconception that this is the case. But because your credit score is about your creditworthiness it tells lenders about your credit behaviour, not your salary.
This doesn’t mean a high income doesn’t help when applying for credit. We explore why income isn’t a part of your credit score, but how your high income can help you get approved for credit.
What matters when it comes to your credit score?
When you apply for credit, the lender will check your credit score. Because your credit score is based on your credit history—your income, assets and investments are not included. Your credit score isn’t about how much money you have. It’s about how you manage it.
Instead, your credit score is impacted by how responsible you are at managing the credit that you have. Here are the factors that do impact your credit score:
- Your repayment history
- Credit enquiries
- Defaults or missed payments
- Court judgements
- Serious credit infringements
Why your income matters
While salary has no influence on your credit score, your income does impact your ability to be able to make repayments on a loan. So a lender is going to take this into account in their decision to approve credit for you, making it an important factor in getting approved. It’s just that it’s unrelated to your credit score.
Just because someone has assets and income, it doesn’t guarantee they will use them to pay back the loan. A lender needs to identify who can pay back the loan without being overwhelmed.
They’ll often use their own credit scoring models to evaluate if you will be approved for a loan. And your income is one of the factors that will form part of this model.
The main impact your income has on your credit score is through your debt to income ratio.
Understanding your debt to income ratio
Your debt to income ratio (DTI) looks at how much you owe compared with how much you earn each month. Lenders want to know you can make repayments and pay off any new loans. One way they can try to work this out is to use this ratio. It takes your monthly income and compares it with all your debt payments, as well as any potential new payment for the loan you are applying for.
An ideal debt to income ratio is around 36% or less, although the lender will be looking for a DTI of not more than 30% for some types of loan.
The higher your income, the more repayments you will be deemed to be able to afford. And the lower your debt to income ratio will be.
A lender is wanting to see a ratio that isn’t too high, so that if you take on more credit you won’t be stretched to the limit.
So it’s not so much about what you earn, it’s about how your debt level compares to your income.
What happens when you aren’t on a high income?
If your income is low, this doesn't necessarily mean you won't be approved for credit. Lenders are concerned with your ability to be able to repay the money that you borrow.
This means that low-income earners may be limited in the amount they can borrow and might need to opt for a longer repayment term to be able to cover their repayments comfortably.
When it comes to buying a home, having a good initial upfront deposit can be beneficial as it will make your ongoing monthly repayments lower.
Besides looking for ways to increase your income, paying off credit card and personal loan debt and closing these accounts can help improve your debt to income ratio, making it more likely that you’ll be approved for future credit.
As we’ve seen, while your income doesn’t affect your credit score, it does play an important role in being approved for a loan. But having lots of disposable income is unlikely to overpower a poor credit history containing lots of late payments and defaults.