Why isn’t your “Income” 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.

Another much debated factor is “income”. Yes, income does not impact your “credit score” but 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 take informed decision of approving or rejecting your loan application.

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

  • 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 is 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. High number of enquiries negatively impacts your score as it portrays a credit hungry behaviour.

Income is not an indicator of the past credit behaviour and nor does it help in predicting the future credit behaviour. Hence, it is not a part of your Credit Score calculation.

Don’t forget it is your credit report and score….not your income report and score!

About Author

Satish Mehta

Satish Mehta is a mortgage finance and credit information veteran with global and domestic experience of over 40 years. He runs a boutique consulting firm - Athena Advisors. He is a consultant to the World Bank Group and a Professor of Practice at the Ahmedabad University.