Yahoo Finance 5 Ways Your Income Can Help Your Credit Score
As your income increases, you can improve other aspects of your financial life to help you build wealth. One area where a higher income can help you is your credit score. Even though your income isn’t listed on your credit report, a higher income helps with your credit score because you’ll be able to pay down, improve your financial stability and reduce your credit utilization.
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What are the five different ways your income can help your credit score?
1. Pay Down Debt Quickly
If you have credit card debt, you can pay it down quickly with a higher salary. As your income grows, you can more aggressively pay down your debts.
“You’ll have more financial leverage for paying off outstanding debts faster with a higher income,” said Benjamin Walker, CEO and founder of Ditto Transcripts. “A lower total debt results in a better debt-to-income ratio than lenders as it signifies how much of a good borrower you are.”
With your credit utilization ratio accounting for 30% of your score, you can hurt your credit by carrying too much debt. With less debt, you become more creditworthy to lenders.
2. You Pay Your Bills On Time
With a higher income, you have a better chance of paying your bills on time, helping your credit score. Since your payment history accounts for 35% of your credit score, you have a better chance of making prompt payments when you can.
“Creditworthiness is an assessment of how likely you are to pay back loans on time and following the loan terms,” said Daniel Cohen, a founding partner at Consumer Attorneys. “In theory, having a greater income gives you more money to put toward your debts and make timely payments.”
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When you make your payments on time, you demonstrate to lenders that you can be trusted to borrow money and meet your financial obligations. Consistency in timely payments will help you maintain and improve your credit score.
Walker added, “Lenders prefer to see someone paying on time because it shows responsible fiscal behavior. A higher income thus keeps you safe from the uncertainties of defaulting due to lack of funds.”
Walker noted how an increased income gives you more space to be financially stable to avoid missing out on making loan payments.
3. Avoid Credit Card Debt
When you make more money, you can likely save more and build an emergency fund to avoid debt. When your income is low, you won’t always be able to cover an emergency or keep up with your bills.
“If you’re even moderately good at managing your financial affairs and you have a higher income, you likely won’t be felled by unexpected hits like a surprise health scare, home repair problem, or car trouble,” noted Cohen. “Someone with a lower income, no matter how diligent they are with debts and money, typically don’t have the luxury of navigating the unexpected as easily, which can lead to financial trouble and a lower credit score.”
If you can avoid credit card debt, you’ll improve your credit score since you owe less money and are not behind on payments.
4. Get Approved For More Credit
Lenders want to know that you’ll be able to pay your bills on time before issuing you any credit. When your income increases, lenders will likely trust you with additional credit as you access more funds now.
Let’s say you get a new job or a raise that significantly increases your income. You can contact your lender to inform them of this to get a higher credit limit. If you’re making more money, your credit card company may be included in raising your limit. While raising your limit doesn’t automatically increase your credit score, it gives you more access to credit, and if you don’t use this, you’ll improve your credit utilization ratio.
“A higher income can help you maintain a lower credit utilization ratio,” noted Walker. “This is how much of your available credit limit you can use at any specific time.”
As your income increases and your credit limit increases, you prove to lenders that you can be trusted with access to credit.
“More earnings make it possible for one to pay off large balances on their credit card accounts, hence keeping their usage low. This way, lenders understand that you can manage your available amount responsibly without over-relying on it.” Walker said.
5. Better Financial Habits
Your income often reflects your financial habits and choices, as a high income indicates that you’ve invested in acquiring skills. When you make more money, it’s likely because you’ve taken the steps to improve your financial situation.
As you build excellent financial habits by making payments on time and not getting into credit card debt, you build up your credit automatically as you’re taking all of the proper steps.
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This article originally appeared on GOBankingRates.com: 5 Ways Your Income Can Help Your Credit Score
