Does Your Income Affect Your Credit Score?

A credit score is generally regarded as an accurate snapshot of a person’s personal credit health, so it makes sense to assume that how much money you make would have a big influence on your score, right? Wrong. While it may be counterintuitive, your income actually has no direct influence on your credit score. In fact, there is no spot on your credit file where your income is even listed.

However, just because how much you earn doesn’t appear on your credit report, it can still have a strong indirect effect on your credit because cash flow invariably impacts how we manage our spending and debts. To help understand the overall influence of income on your credit score, we’ll explore the subtle ways your earnings can indirectly shape your score.

Credit Score Calculations

Though income doesn’t directly influence your credit score, it’s helpful to understand the five main factors that have the biggest impact on your credit health. Canada’s two major credit bureaus, Equifax and TransUnion, calculate each person’s score based on five key factors: 

• Payment History (35%): The biggest component of your score, it measures how often you make timely payments.

• Credit Utilization (30%): This is the percentage of credit you're using versus your total credit limit. 

• Credit History (15%): The age of your credit accounts.

• Credit Mix (10%): What mix of credit you have, such as revolving and installment credit accounts.

• Credit Inquiries (10%): If you applied recently for credit, potential lenders do a hard pull on your report that might cause a temporary dip in your score.

The Role Of Income On Credit Scores

Income isn't directly factored into credit scores by Canada’s two credit bureaus. Therefore, whether you earn slightly more than minimum wage or rank among the highest incomes in Canada, theoretically, both types of earners have an equal likelihood of achieving a high score. Yet in reality people with generous incomes may have a better chance of maintaining a high score because of the indirect effects of income on credit scores. 

There are mainly four ways in which income can indirectly affect your credit score:

Timely Payments

If you are one of the lucky Canadians with a large, reliable cash flow, clearly it will be less of a challenge to meet your monthly credit obligations. A steady income stream gives you the financial stability needed to make your monthly payments not only on time but in full, which helps prevent debt accumulation as well. A big paycheque ensures that you are less likely to fall behind on your payments and timely payments are a cornerstone of building a strong credit score. 

Credit Utilization

As noted above, credit utilization (which refers to the proportion of credit you’re using out of the total amount of credit you have available to you in your name) is a significant part of your credit score. Generally potential lenders like to see a credit utilization ratio below 30%. People with more substantial earnings can more easily pay down their revolving credit balances, which in turn creates a lower credit utilization ratio and, subsequently, has a positive impact on a credit score.

Access To Different Types Of Credit

A steady paycheque means that lenders are less likely to perceive you as a credit risk, and this enhanced financial reliability makes you a more attractive borrower. Consequently, you’ll frequently be successful in applying for credit and will even be eligible for a large variety of credit, such as premium credit cards, lines of credit and overall favorable loan terms. These financial opportunities are not as accessible to those with less predictable income. Access to a diverse array of credit also contributes to a positive credit mix, increasing your credit score.

Reduced Reliance on Credit

If you have a reliable income that is more than enough to cover your day-to-day expenses it also likely means that you’ll rely on credit much less than someone with a lower income. A substantial income means that you can put enough aside each month to even cover emergency or unforeseen expenses like a major home repair or needing a new vehicle. This reduced reliance on credit cards and loans makes it easier to avoid debt and thereby keep your credit score high.

Tips for Managing Credit and Income 

If you have a modest or inconsistent income, that’s not to say that you can’t have a strong credit score as long as you manage credit wisely. Here are some tips.

• Budgeting: Create a detailed budget to prioritize essentials and control spending.

• Timely Payments: Set up reminders or automatic payments to ensure bills are paid on time.

• Credit Utilization: Monitor credit card balances carefully to maintain a healthy credit utilization ratio.

• Diversifying Credit: Explore different credit options to enhance your creditworthiness.

• Build an Emergency Fund: Establish a financial safety net to cover unexpected expenses and reduce reliance on credit during tough times.

Bottom Line

Income has no direct impact on your credit score but high earners may have an easier time managing their credit, which can have a positive knock-on effect. Yet those with modest means can keep their score strong by doing things like budgeting, always making timely and full payments and putting aside money for emergencies.