What is the impact of your income on your credit score? | Explainer

Income’s indirect impact on credit

What credit score really measures

Your credit score reflects your ability to handle debt, not your income. It is based on your payment history, use of credit, length of credit history, types of credit, and new loan inquiries. In India, firms like CIBIL or Experian use this data to provide a score between 300 and 900 — the higher, the better.

Ironically, your income per se is not considered directly here. You can be earning Rs.30,000 or Rs.3 lakh a month — your score will reflect how well you manage whatever credit you already have.
Why income still matters indirectly

Though income doesn't directly enter your credit score formula, it indirectly makes you more likely to repay loans and maintain low credit card balances, which keeps your score in check. If you have low income and strain your wallet to pay for EMIs or credit card dues, you're likely to miss or delay payments — an easy way to bruise your score.
So while credit bureaus aren't tracking your pay-cheque, debt management — which is based on the stability of income — influences the very factors that create your score.

What lenders look at besides the credit score

When you are applying for a loan or credit card, lenders don't take into account your score alone. They look at your income, profession type, and debt-income ratio as well. This is because they want to see if you are able to shoulder more credit. For instance, even with a great credit score, if your income is not high compared to the EMIs you are already paying, the lender might decline giving you another loan.

Essentially, your credit score indicates your credit management capability, while your income indicates the amount you can manage. Both are vital — but in two different ways.

Keeping your credit score good regardless of income

You don't need a high income to possess a good credit score. Follow the following simple habits:
• Pay all bills and EMIs punctually.
• Utilize less than 30% of credit card limits.
• Avoid taking more than one loan simultaneously.
• Check your credit report periodically for mistakes.

Consistency is more important than income in establishing and developing a good credit record.

FAQs

1. Does my income directly influence my credit score?

No, your income figure does not directly influence your credit score. But it affects your ability to repay, and that in turn can impact your score.

2. Will job changes or income fluctuations decrease my score?

Not at all. Credit bureaus do not track your employment details for scoring. Just keep your credit payments regular.

3. Is it conceivable that a person with a high income can have a bad credit score?
Yes. In spite of their high income, not paying EMIs, defaulting, or piling up credit cards can deteriorate a person's credit score.