Have you ever thought if there is a connection between your income and your credit score? Against a commonly held perception, there is no direct link between the two.
Although higher income definitely raises your potential to repay your bills and loan EMIs on time, thus impacting your credit score indirectly, it does not have any direct bearing on the score.
Let us understand this in detail here.
Key points on the impact of income
I. Factors determine credit score: Key factors which determine credit score are the payment history, amounts owed, length of credit history, new credit, and credit mix.
However, with higher income, an individual’s ability to handle higher loans increases, which positively impacts the credit score. This is a correlation, albeit indirect.
II. Higher income: There could be a scenario wherein someone earning a higher income fails to repay the loans on time, or maxes out his credit card, or cancels his old credit accounts. That individual could have a lower credit score despite a high income.
III. Lower income: Conversely, there could be a scenario wherein someone with a lower income does everything right to keep a high credit score. So, that individual, in all likelihood, would have a high credit score despite a lower income.
IV. Right proportion: Typically, one should borrow in the right proportion of his income. For instance, someone who has a very high income can afford to take a higher credit limit. One should refrain from utilising more than 30 percent of the overall credit limit. And the lower the credit, the easier it is to repay it.
V. Future income: There are times when credit card users take new credit based on projected income in the future.
Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
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