Debunking Credit Card Myths: Does Your Income Impact Your Credit Score?
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We devote a lot of coverage to travel rewards credit cards here at TPG. When you sign up for new cards and then utilize them strategically at various types of merchants, you open up the ability to redeem your points and miles for things like first-class flights and luxurious hotel rooms. However, there are a number of misconceptions out there when it comes to credit cards, so today I’ll continue our new series that debunks these myths and allows you to begin planning for your next vacation.
Previous entries included having too many cards, closing a card you don’t use, not paying your balance in full and paying an annual fee. Today I’ll consider an aspect of your financial profile that seems like it should have an impact on your ability to be approved for a card.
Myth #16: My income affects my credit score.
When you apply for a new card, the application page will always ask for your income. On the surface, this seems like a pretty obvious request. After all, why would an issuer want to extend a huge line of credit to a student without a full-time job? This leads many to assume that your annual income must have an impact on your credit score.
This is actually not the case. While it’s true that an issuer will look at your reported income when considering whether to approve or deny your application, your actual credit score has nothing to do with how much money you make in a given year. Here it’s important to once again revisit the five main factors that contribute to your FICO score, the one most frequently used to determine creditworthiness:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
As we’ve mentioned before, these five factors are weighted based on how important they are to your score:
Notice that none of those categories have any connection to your annual income. Instead, each one relates to how well you have managed the various lines of credit that have been extended to you (or attributed to you, in the case of accounts on which you are an authorized user) over your lifetime. Remember that your credit score is a reflection of your creditworthiness, so whether you’re making $50,000 a year or $500,000 a year is irrelevant. What matters most is the set of factors above.
In addition, when you apply for a new credit card, that issuer has no way of actually checking how much you make in a given year. Even if you list your employer on the application, the issuer can’t access your payroll records, and if you hold side jobs or have other income like dividends or capital gains, those wouldn’t be included either. The income you report is just one element in determining whether or not you’ll be approved for the new card. Generally speaking, the annual income number will only potentially impact the credit line you wind up getting.
This topic is really important for two different groups of readers:
- Those with limited income: Many of you may be new to the points and miles hobby (or workforce in general) and are worried about applying for a credit card with a low income amount. Don’t be! I’ve read many reports of full-time students with almost no income getting approved for new cards. Just don’t expect a whopping credit limit, and I’d probably wait to try to go for a premium travel rewards card.
- Those with high income: If you’re a reader with large annual income, don’t think that you have a blank check to do whatever you want when it comes to credit cards. Even if you make a million dollars a year, you could wind up with a low credit score if you don’t manage your payments and balances effectively.
For additional recommendations for managing your credit card account(s), be sure to check out my Ten Commandments for Travel Rewards Credit Cards.
Your credit score is a critical piece of the puzzle when it comes to applying for new travel rewards credit cards, and many individuals think that their yearly income has an impact on their score. Fortunately, that is not the case, as you can be a low-income credit card holder with a credit score in the 800s. However, you can also be a high-income cardholder with a score in the 500s. At the end of the day, it all comes down to how well you manage the lines of credit that have been extended to you, not how large of a paycheck you’re cashing each pay period.
What are your thoughts on income and its impact on the credit card approval process?
Featured image courtesy of Image Source via Getty Images.
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