Your income and your credit score are two of the key ingredients used by lenders to determine whether to give you a loan, and at what rate. Despite their shared use in loan decisions, income has no direct impact on your credit score. Your rating is based on a number of factors related to your use of credit. Income does play a role in your ability to build and maintain a good score, though.
Credit Score Basics
Credit scores are ratings issued by three major credit reporting bureaus in the United States: Trans Union, Equifax and Experian. While each score varies a bit, all are generally connected to a proprietary scoring model, commonly known as a FICO score, that was developed by the corporation named FICO, formerly the Fair Isaac Corporation. Criteria used to rate your credit include your payment history, which has a 35-percent impact; debt utilization, which has a 30-percent effect; your length of credit history, with a 15-percent impact; and types of credit and new accounts, each of which has a 10-percent impact on your score.
Income and Payment History
The real concern when it comes to income and credit is how to best use your income to improve your credit score. Given the importance of your payment history, making on-time payments is one way. Each month, many Americans get home and car loan bills. Personal loans and credit card statements may also arrive in your mail. Balancing your budget to easily allow you to make at least the minimum payments by their due dates is one of the best ways to help your score.
Paying Down Debt
To help your score even more, add a little extra to your payments each month. Eat out less often, and cut back on the lattes to see if you can add $50 to $100 onto your payments for your credit cards with the highest interest rates. The 30-percent debt utilization category is based on the amount of your available credit currently in use. For example, having a $2,000 balance on a card with a $5,000 limit is a 40-percent usage ratio. This is reasonable, but not ideal. Excellent credit scores usually come with ratios below 10 percent, according to announcements from FICO in early 2011. Each time you add extra to your card payments, you lower your ratio on that card and on your total account balances.
Rely on Your Income
One of the best preventative methods and cures for credit woes is relying on your income for purchases. Making a habit out of turning to credit cards when you don't have cash to pay for new boots, concert tickets, or a night out on the town eventually leads to higher debt and more risk to your credit score. Compare your income to your expenses, including home and auto loans, leave a little room for fun and savings, and make immediate payments on any credit card purchases to optimize your credit score.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.