Why Isn’t Income Part of My Credit Score?

Credit Score

After a series of financial setbacks, Eddie’s income is on the upswing. But that doesn’t seem to be helping his credit scores one bit. He wrote in an email asking why it didn’t:

I bring home $650 a month MORE than when I worked, and my monthly outlay is $700 less, so I have $1,350 more disposable income every month than I had when I had all that debt. Yet I can’t get a freakin’ credit card?

Why doesn’t income affect your credit scores?

“As important as it is to understand what does impact your credit score, it’s important to also know what isn’t included,” says Sarah Davies, Senior Vice President, Analytics for VantageScore Solutions LLC. “Income does not impact your credit score. Other things that do not impact credit scores are race, color, religion, nationality, gender, marital status, age, occupation, title, employer, employment history, where you live, or even your total assets.”

She goes on to explain that “a credit score is designed to determine the likelihood that you may default on a credit account. In other words, just because someone might earn more money than another person does not necessarily make them more or less risky.”

But there’s another explanation for why income isn’t used: it’s not on your credit reports.

Why not? Credit scores are calculated using the information in credit reports, and verifiable information about income isn’t listed there. The major credit reporting agencies rely on data reported by third parties (creditors and public records), not “self-reported” data supplied by consumers. Where would they get accurate income information for every person in their databases?

Employers aren’t going to supply it. Tax records might be a possibility, but since your tax data is confidential, you would first have to agree to allow the IRS to share your data. Going a step further, if taxpayer income was provided to credit reporting agencies, there would have to be a mechanism in place to handle disputes if you believed the income reported was incorrect — and it’s hard to see how the government would want to get involved with that.

How Income Is Used

The bottom line is that income isn’t part of your standard credit score.

While that may bother high earners or those, like Eddie, whose incomes are on the upswing, overall it is probably a good thing. You can be self-employed — or even unemployed — and that doesn’t hurt your scores one bit, provided you can still pay your bills on time. Anyone who works for themselves and has tried to apply for a mortgage in the past couple of years knows how difficult it can be to prove your income to a lender.

That doesn’t mean income is irrelevant. It’s not. In fact, all lenders will ask you what you earn on your application, and they may have a minimum income requirement. Some lenders will accept the number you report as long as it appears reasonable, while others may require you to document what you earn with copies of your paystubs, tax returns, or even by directly contacting your employer to verify your income.

With that number, the lender can calculate a debt-to-income ratio based on the income you have reported. They may even use a custom application score that factors in how much you make. “Lenders, on the other hand, may take income into consideration as they can make more subjective decisions as to whether to loan you money, how much, and under what terms,” Davies points out.

At least one consumer organization, the Consumer Federation of America, says there is a link between credit scores and income. In their report, “The Use of Credit Scores by Auto Insurers: Adverse Impacts on Low- and Moderate-Income Drivers,” they maintain that lower and moderate-income drivers are more likely to have lower credit scores “due to economic circumstances.”

“Income affects your credit, but not your credit score,” explains Steve Ely, president of eCredable.com, a firm that helps consumers establish credit using bills that don’t show up in traditional credit reports. “When lenders make decisions about your creditworthiness, income is always a key consideration. They don’t want to lend money to someone who obviously can’t afford to repay it. Your credit score is a key factor that helps them understand how you’ve behaved in the past (when it comes to meeting your financial obligations), and are likely to behave in the future.”

This means that just because you have a high income you may not have an excellent score, and even with a modest income, your credit score could be stellar. The only way to know is to check your credit scores, which you can do for free at Credit.com.

The True Cost of Bad Credit

Life’s easier if you have good credit, financially speaking. It can be challenging to get to that point, but aiming for great credit is a worthwhile goal, considering how costly it can be to have bad credit.

You could have poor credit for a variety of reasons, and if you look at your credit score and credit reports, you’ll probably be able to figure out why. Perhaps you have trouble making loan payments on time, or your credit card balances add up to more than 30% of your limit — poor credit could also be the result of having a very short credit history. No matter the reason, having bad credit means your history (or lack of history) makes you seem like a risky borrower to a potential lender.

If you have bad credit, you’ll want to work to improve it. Otherwise, you can face some obstacles.

It’s Hard to Get Loans

The lower your credit score, the less likely you are to be approved for loans and credit cards. If you’re approved, your poor credit standing often results in higher interest rates on the loan.

Credit reports and credit scores aren’t the only factors in loan-application decisions, but you want them to be an asset, not a liability. There are hundreds of credit scoring models out there, and you’ll never know which ones your potential lenders will use in their decision-making processes, so it helps to focus on the fundamentals (paying on time, using credit conservatively, etc.).

You Pay More

Having poor credit is costly. Yes, high-interest rates will force you to pay more than someone with great credit who is borrowing the same amount of money, but non-credit industries also consult consumer reports and scores when pricing their products.

For example: When you set up your utilities or get renter’s or car insurance, your credit standing may play a role in determining how much you pay. If you don’t meet certain credit standards of your electricity provider, you may have to pay a deposit when you have services turned on. Utility companies do this because statistically, people with poor credit are more likely to fall behind on or fail to pay bills. By asking for more money upfront, they protect themselves from loss.

Your landlord will probably pull your credit when you apply for an apartment, too, because he or she wants to know if you’re likely to pay the rent on time. Again, you may be required to pay a higher deposit because of poor credit.

Potential employers can also pull your credit reports, though you have to give them permission to do so. Certain states restrict the use of credit reports in the hiring process, so check to see what your state allows.

Even if you’re not planning on taking out loans, you should stay on top of your credit standing by regularly reviewing your credit reports and scores. Failing to check them means you may not find out about errors on your credit report until they’ve adversely affected you, and it’s best to address mistakes before they cause bigger problems. You’re entitled to a free annual credit report from each of the major credit bureaus, and you can get two of your credit scores for free with a Credit.com account.

Central Credit Reference Information System of Malaysia

Central Credit Reference Information System

There was a story in The Star telling that an applicant who changed her mind and never collected the credit card. However, RM5 was debited into the account. Because the card was neither collected nor used, it may be presumed that no statements were sent.

As often happens, a surprise awaited the individual concerned when her application for a housing loan at another bank was rejected because she had been “blacklisted” on account of the outstanding debt of RM5 that had been reported to the Central Credit Reference Information System (CCRIS).

According to the article, Credit Worthiness, there is no such thing in law as a blacklist described or defined anywhere or in any document. It is a word that has come to refer to arrangements made by individuals, groups, or even institutions to create an “alert” system.

However, through the ignorance of some of the officers of lending institutions or institutions granting credit, and lack of appreciation of the role of such an alert system, its usefulness is not really appreciated and instead results in inconvenience. The purpose of such a list is not to condemn an individual just because his or her name is on it.

Its real purpose is to alert the organization to which a loan or other application is made as to some relevant aspects of the individual or organization’s past dealings with a view to a possible critical examination. The existence of such a list is to assist in the process of credit evaluation. This can only be done by asking the person concerned for an explanation with regard to the nature of the list.

The individual is put through unnecessary inconvenience for which there is no real remedy. This is because the repository of the information will merely claim to store and making the available date. The lending institution will say that at that stage, there is no contractual relationship that can be the basis of wrongdoing.

The writer, Bhag Singh, recommends that given such a scenario, the welfare of the individual can only be protected by having institutions with better-trained officers and regulatory bodies that can exercise greater vigilance to safeguard the interest of the public.

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