If I were rich, I’d have a great credit score. Is this ever something that you’ve thought? On the surface, it seems reasonable to think that having a lot of money would lead to a higher credit score. However, earning a lot of money and having a high credit score don’t necessarily go hand in hand. It is actually a credit myth that you need to earn a lot of money in order to have a good credit score.
This post has been sponsored by Lexington Law. All opinions are mine alone and are honestly conveyed.
Income is not a factor of your credit score
Having a nice income is great, but whether you make a lot of money or have a job working for minimum wage, doesn’t really matter when it comes to credit score. When it comes to earning a higher credit score, how you spend your money is far more important than how much you are earning. In fact, income information is not something that is even reported to the credit bureaus. Why? The quick answer is that your income level is not an indicator of how well you will pay your bills. Just because someone has plenty of money doesn’t necessarily mean that they will pay their bills on time—or at all. Unfortunately, sometimes, having access to lots of money just means that one ends up being broke at a higher level. Living within your means is always the golden rule of budgeting—regardless of what income level you are at.
How credit score is determined
There are three credit bureaus—Experian, Equifax, and TransUnion—and they all utilize the Fair Isaac Corporation (FICO) method of analyzing consumer credit risk. The FICO scores from each of these bureaus are most likely using slightly different information because not all creditor report to all three bureaus, however, the bureaus are all looking at the same type of credit factors to determine your FICO score:
- Payment history, 35%
- Amounts owed (balance to credit limit ratio), 30%
- Length of credit history, 15%
- New credit inquiries, 10%
- Mix of credit accounts, 10%
You should regularly track and protect your identity, credit, and finances to make sure that no false information is showing up on your credit report, which could impact your credit score.
How you spend your money is more important than how much you make
Understanding that how much money you make doesn’t affect your credit score, but how you spend that money does, can definitely help guide your budgeting and spending habits. Yes, having more money can potentially allow you to qualify to buy a bigger home or a luxury car, but it doesn’t make you a wise manager of those funds. So, for example, someone who sacrifices spending money on vacations, the latest clothing styles, or the newest tech devices to pay their bills on time every month over the course of months and years will be able to obtain a higher credit score than someone who has plenty of money but chooses to rack up debt that they even they can’t afford to pay or doesn’t bother to make their payments in a timely manner.
Tips to help you raise your score
Having a lot of money won’t give you a high credit score, but there are some steps you can take, no matter what income level you are at, to help raise your credit score:
- Make your payments on time.
- Pay off bad debts and work to get them removed from your credit report. Remember, that simply because an account has been paid off or settled doesn’t mean that it has been removed from your credit report. You will need to follow up and make sure that the updated information has been sent to the credit bureaus.
- Pay down credit cards so that you carry a low balance in relation to the credit line.
- Don’t open too many new accounts within a short period of time—these accounts don’t have much, if any history to report, so they can actually drag down your score
- Don’t close unused accounts—believe it or not, these unused accounts show credit that has been extended to you that you are not using, and that can potentially help raise your credit score.
- Pay off a loan—successfully paying off a credit card, auto loan, or other debt with on time payments can help boost your score.
Your credit score may affect the job you have
Did you know that bad having a low credit score or negative information showing up on your credit report could actually keep you from getting a job? Some employers actually look at your credit report as part of the interview process to determine if they want to hire you. Now, this isn’t done automatically for every job, however, many employers—especially in the financial services industry—may want to know this information.
So what are these potential employers looking for? They may be interested to know how you manage your own finances for a few reason. First, if you are pursuing a job in the financial services industry, having a good credit scores is one indicator that you know how to handle your finances and can credibly deal with the company’s clients. Next, a credit report may also indicate your level of trustworthiness. If an employer is going to entrust you with a job in which you will need to sagaciously handle their funds or assets, they may want to know that you do it with your own money. Lastly, if you are interviewing for a job in which you will have access to other people’s sensitive information, such as social security numbers, bank account numbers, address, and birthdate, the employer wants to make sure that you won’t be tempted to utilize this private information.