Why your income is not a part of your credit score

Race, religion, gender, nationality, marital status and employment history do not impact credit scores. It is because these factors do not help in assessing the credit worthiness of an individual. In several countries, it is not legal to use these factors to calculate credit scores.

There is another much-debated factor – income. Yes, income does not impact your credit score; however, it could impact your “credit worthiness.” Whilst the bank would be interested in knowing your income in your loan application form, it is not included in the credit score calculation. The bank would use your income to appraise your credit worthiness and will take an informed decision of approving or rejecting your loan application.

This is because the high income of an individual does not make him / her less risky. Similarly, low income does not make him / her more risky. Credit behaviour of an individual is “independent” of income. Instead, banks use income for the calculation of ratios like:

• Debt to income ratio
• Fixed obligation income ratio
• Instalment to income ratio

Credit scores are calculated based on factors that provide an indication of the past credit behaviour of an individual. These are some of the factors that help predict future credit behaviour like:
– Payment history – It explains your credit behaviour in the past 36-48 months. Your timely repayments or defaults are listed here.
– Amounts owed – It is the outstanding amount against all your open credit cards and loans.
– Length of credit history – It shows how long the credit card or loan account is open or used.
– New credit – It includes any new credit facilities like credit cards or loans which you have availed in the recent past.
– Nature of credit facility – It is the type of credit facility availed, i.e. secured or unsecured. A balance between secured and unsecured loans will help you build a good credit score.
– Enquiries – It is the number of times you have applied for a new credit facility. A high number of enquiries negatively impacts your score as it portrays a credit hungry behaviour.

Income is not an indicator of your past credit behaviour, nor does it help in predicting your future credit behaviour. Hence, it is not a part of your credit score’s calculation. Don’t forget, it is your credit report and score, and not your income report and score.

ABOUT THE AUTHOR

Satish Mehta is the Founder and Director of www.credexpert.in – a credit and debt counselling company that provides end to end customized counselling to individuals by handholding them through their credit life cycle.