Credit Score Mythbuster: Does Being Rich Improve Your Credit Score?

When we recently quizzed CredAbility members on things they think do and don’t affect your credit score, income was one of the most common misconceptions. 45% of the members who took part in our quiz thought that how much you earn plays a part in what your credit score is. But were they right, or were they wrong? Let’s find out.

Does your income affect your credit score?

Your income – however large or small it is – does not affect your credit score directly. You’d be forgiven for thinking it does, because lots of credit score providers (including CredAbility) ask you about your income when you sign up with them. But, it’s not part of your credit score.

Your credit score is calculated using only the information that’s included in your credit report. Employers, local authorities that pay benefits payments, pension providers and other places you might receive your income from don’t usually report to credit reference agencies. So, information about your income isn’t included in your credit report and doesn’t count towards your credit score.

But, that’s not to say that your income doesn’t matter at all when it comes to your credit score and your credit eligibility.

Why does your income still matter?

The indirect impact your income has on your credit score

Your credit report only deals with the cold, hard facts of your finances – was that payment made on time? Did this credit search occur on this date? – and not why those things happened. Your income, or issues with it, lurk in the background – a big but unseen reason that the information that is used to work out your credit score is there. For example, perhaps the reason your score has improved so much lately is because a massive pay rise means you’ve been able to pay your credit card bill off in full sooner than you expected. Or, maybe the reason you clocked up a few score-damaging missed payments a while back is because you couldn’t pick up as many shifts at work at that time and your income took a hit.

If you’ve had an issue with your income that’s meant you have some negative information like missed payments on your credit report that’s bringing your score down, then you may feel that by only including the top-line facts, your credit report paints you in a bit of an unfair light. Thankfully, there is something you can do about it, called a Notice of Correction. A Notice of Correction is a short statement that you can write yourself to explain something in your credit report that’s true, but that doesn’t tell the whole story – like missing a payment because you were paid late by your employer. You can submit this statement to the credit reference agencies (Equifax, Experian and TransUnion), and then it’ll be included in your credit report for lenders to see and take into account as and when you apply with them.

But, a word of caution about Notices of Correction: you can’t just say whatever you like and get it added to your credit report. It must be a factual and truthful statement, and not include any defamatory or sweary language. When you submit a Notice of Correction to the credit reference agencies, they will check it, and can ask you to make changes to it before it’s published. They may also pass a copy of your statement on to the Information Commissioner’s Office for them to consider if they feel it’s not publishable.

Affordability

Even though your income isn’t a direct part of your credit score, it does still play a role in lenders’ decisions on applications you make to them. As well as assessing how likely you are to pay them back, which is what your credit report helps them do, lenders also look at how affordable the payments they need you to make are. After all, what good is being trusted to reliably make your payments every month if making them leaves you too skint to get to work or buy groceries? Lenders’ decisions tend to be based on a mixture of what your credit report says about you, and what you can afford.

But, how do lenders know what you can afford? Usually, they’ll ask you a bit about your income and your regular financial commitments when you apply to them and go from there. Some lenders may ask you to send them proof of your income, like a payslip. But, when it comes to your expenses, it can be tempting to ballpark the figures if you’re not sure about the numbers, stretch the truth a bit, or downplay your spending on certain non-essentials in case that causes the lender to decline you. Lenders expect you to do a bit of guesswork and they do make allowances for that, but being as accurate and truthful about your income and expenses as you can helps everyone in the long run. You’ll be less likely to end up with repayments you can’t afford to make, and the lender is more likely to get their money back, which in a roundabout way helps them keep interest costs down.

Is there a minimum income threshold to get credit?

Lenders all set their own criteria around who they will and won’t lend money to. These criteria are not usually made public by lenders as they’re kind of their secret sauce, but they may include a minimum income requirement. If a lender does have a minimum income threshold, then they won’t have set it by plucking a random number from the air, or to avoid getting “poor” customers. Rather, it’ll be because under the regulations all lenders have to follow, they believe they need it to make sure they’re lending responsibly to customers who can afford to pay them back.