Did You Know . . . Income Doesn’t Count in Your Credit Score
There is certainly no shortage of misperceptions floating around in cyberspace. One of the most common is that income, net worth, and other wealth-related metrics can influence credit scores.
Credit scoring models only consider information that appears on the credit reports compiled and maintained by the three major credit reporting companies (CRCs), Equifax, Experian and TransUnion. Income, net worth, and balances in savings, checking and investment accounts do not appear on credit reports. As a result, wealth-related metrics can neither help nor hinder credit scores.
One reason for this is that wealth is not necessarily a good measure of credit-worthiness. Wealthy people are capable of filing bankruptcy and missing loan payments, and plenty of low-income consumers live within their means and pay their bills on time. It is just as easy for someone working part time making $10 per hour to earn a great credit score as it is for someone making $100,000 per year.
That said, even a borrower with outstanding credit habits cannot repay loans if they don’t have the means to make the required monthly payments. So, in tandem with credit scores, lenders commonly do use a variety of wealth metrics to determine consumers’ ability to make payments. Those metrics include income, debt-to-income ratio, and net worth. Nonetheless, although it is great to have an impressive income and net worth, it’s not going to gain points in a credit score.
Lenders, of course, will consider a consumer’s income because lenders want to feel comfortable that a borrower has the ability to make payments each month. It is at that point when a consumer’s income and wealth metrics will be considered—during the underwriting process. For example, if a consumer is trying to borrow $500,000 for a mortgage and the payment is $2,323 per month (which it would be with the highest credit scores), then the lender needs to know that the borrower can afford to pay that amount every month for the next 30 years.
Since credit scores are not a reflection of wealth, lenders typically seek documentation of a consumer’s ability to make payments. Lenders may ask a borrower to provide tax forms, bank statements, and pay stubs as part of a loan application. Combined with a solid credit score, proof of a consumer’s ability to make payments each month will show a lender both that the borrower is able to make his or her payments, and will choose to do so.