NEW YORK (MainStreet) — How does your income impact your credit rating? It's true that your income is not revealed on your credit report. But that doesn't mean there's no correlation whatsoever with your credit score. Whether we're talking about hard facts, anecdotes or conventional wisdom, there is definitely some overlap between your income and what your credit score is likely to look like.
Higher Incomes and Money Management
"There's a loose correlation," says John Heath, managing attorney of LexingtonLaw. "People with higher incomes generally know how to manage their money. People with higher education also tend to have jobs where you get paid more."
As a result, such higher-income individuals may be inherently more trustworthy when it comes to credit and manage their money more responsibly so as to achieve a higher credit score. Of course, Heath is quick to emphasize that the correlation between a high income and high credit score is loose and not a direct causation-- in that credit bureaus are not directly integrating one's income into their risk scoring models to determine a FICO score.
"People with higher incomes may have also had access to educational opportunities that people of lower incomes have not," he says. Not only does that make them more qualified for some higher-paying jobs, it also increases the chances that they know how credit actually works. And in turn they know how to use the credit system to their best advantage.
At the same time, Heath says that the difference might not be important at a certain point. "People with lower incomes can often qualify for a house or a car," he says. "They're not going to get an American Express Black Card, though. You have to have a certain level of income to have those kinds of opportunities." In fact, the American Express Black is based more on income than credit score.
There's Not a Lot of Data
Gerri Detweiler, director of education for Credit.com, says that income is something that credit card companies know a lot more about than credit reporting agencies.
"[Credit card] customers are, at the very least, self-reporting the information," she says. However, they're not supposed to report that information to the credit bureaus.
Still, she agrees with Heath to the extent that "if you have money to pay your bills, as long as you're organized, you will probably have a good credit score." A responsible consumer with an average income could conceivably have a higher score than an irresponsible consumer -- one who is consistently late in paying bills, say -- with a high income.
A low income won't have a direct impact from your credit score, per se. It's just that it's easier to keep on top of your bills when you have a higher level of disposable income.
Detweiler says that several studies have been commissioned by state insurance departments and the Federal Trade Commission. Each has used a different dataset, but they've all found a correlation between greater household income and higher credit scores, or at least the reverse -- scores going down the more that income goes down. This is true in such disparate locations as Missouri, Washington, Texas and Florida. The problem is that those with lower incomes don't just have less money. They also tend to have less stability in their finances. So even when they're making the right decisions, they don't always have the right circumstances to pay bills on time.
Inoculate Yourself Against Bad Credit, Regardless of Income
Most of what this underscores is the importance of having an emergency savings fund. Putting away a small amount of money every week out of your paycheck to pay for emergency expenses, or even all your bills in the event of job loss or injury, can help to keep you and your family from being part of the general trend of lower credit correlating with lower incomes. Being able to pay debts in a jam is of the essence.
Indeed, using credit cards as an emergency fund is dangerous for lower-income families for two reasons: first, you get into debt which you might not even be able to pay off later, which results in a lower credit score. Second, even when you get back on your feet, you're going to have lower income.