Myth #7: My income (how much I make) affects my credit score.
Reality: The credit bureaus don’t care how much you make, only your ability to repay back the credit that was extended to you. This information is reported to them by your lenders. Actually, your income is not even reported on your credit report just other employer information like company name and address.
Your income has no bearing on your credit score. I know people that make a 6 figure income and have terrible credit and others that make less than $35k a year and have exceptionally good credit.
Of course lenders care how much you make when applying for credit, and they determine your ability to service this credit using financial ratios and other information when you do a credit application. But once they start reporting to Equifax & TransUnion about your monthly credit activity, the credit bureaus don’t use income to determine creditworthiness.
I think this is fair because the credit score/report does not discriminate based on income, only how well one manages their credit.
Solution: Have a budget in place and live below your mean. Always make sure you try and pay off the balance of your credit cards at the end of each month and don’t take out more credit than you need.
Make sure you have an emergency fund in place in the event of a job loss or a reduction in income, to cover minimum payments on your debts. Some people may decide to use a line of credit as their emergency fund when money is tight (i.e. job loss or maternity leave), but this can lead to serious financial difficulties in the future and possibly tarnish their credit score in the process. If you are spending more with credit than your income is able to pay back in addition to meeting other living expenses, at some point your credit will be affected.
I am a big advocate of having an emergency fund. It’s a great extension of income during tough times. Having said that however, I live well below my means & have only the credit extended that I need. I pay off my debts in full at the end of each month. Having an emergency fund & no outstanding debts gives me peace of mind and sense of control over my finances.
Tags: a lot of debt, budget, Budgeting, Credit, credit card debt, credit report, credit score, dealing with debt, Debt, debt free, debt journey, debt repayment, debt snowball, debt to income ratio, denial about debt, Equifax, goals, gross debt service ratio, income, line of credit debt, paying off debt, paying off student debt, student debt, student loan, total debt service ratio, TransUnion