Does your income impact your credit score?
Whether your income is going up or down, you might wonder if your credit score’s making moves along with it. Credit scores are used by lenders to determine if you’ll be approved for different credit products, like a credit card or a loan.
While your credit score changes based on things like your payment history and how long you’ve had a credit card for, does it improve if you get a raise or pick up some extra shifts? Let’s take a closer look at what impacts your credit score and how your income could play a role in how it all adds up.
Does your income impact your credit score?
The short answer? No. According to Equifax Canada, your income doesn’t directly factor into your score.
But there are other ways that your income can impact your ability to build credit. For example, a lender may look at what percentage of your monthly income you’ll need to make all of your monthly debt payments, known as your debt-to-income (DTI) ratio.
If it’s a lot, lenders might consider you a risky bet to repay your debt. So if you have a high DTI ratio, it would be wise to work on getting it down before applying for more credit.
What actually impacts your credit score?
Your score is calculated by credit reporting agencies (also known as credit bureaus) based on information in your credit report. Capital One reports to the two major reporting agencies in Canada, Equifax and TransUnion, and each uses its own algorithm to calculate your score.
Here’s what they take into account:
Payment history
Are you making your payments on time every month? Missed payments can count against your score, and future lenders will be interested in knowing whether you can stay on top of your payments. Remember: consistency is key!
Credit utilization rate
Represented as a percentage, your credit utilization rate is the total sum of your debt – from credit cards to loans – compared against your available credit. The lower the rate, the better.
Credit history
While being new to credit means you’re starting fresh, a lack of credit history can work against you. The length of time you’ve had credit accounts on file can reflect positively on your score, because it gives lenders a broad picture of your credit management over time.
If you’ve got a credit card in your wallet you’re no longer using, you don’t necessarily need to close it. Unused credit can reflect positively on your utilization rate (mentioned above) by showing lenders that your credit is established.
Credit mix
Successfully managing a variety of credit products, like a personal loan, credit card and even a phone plan, can positively impact your score. Keep this in mind as you build your credit over time and consider applying for additional credit in the future.
Credit inquiries
When you apply for a credit card, it creates a hard inquiry (or hit) on your credit report, which can impact your credit score. The more credit card applications you complete, the more hits you create on your report, potentially hurting your score.
To avoid this, try using a credit card eligibility checker. For example, Capital One offers Quick Check®, which can tell you which card you’re pre-approved for without hurting your credit score (not to mention it’s free).
Set up friendly reminders
You don’t have to be rich to have a high credit score. You can build credit by making payments on time and staying within your credit limit.
A pro tip is to use an online tool to manage your credit, like our free online banking app, which allows you to set up notifications like payment reminders and personal spending limits on your card. There are a lot of factors that go into building your credit score, but over time and with a little help, you can build a good credit score, no matter what your income is!
* If Quick Check pre-approves a card, you can be sure we’ll approve your application, except in limited circumstances. Some of the reasons we may not approve your application, among others, include:
a. There’s been a change in your credit file information, personal information or financial status from the time you receive your Quick Check results to the time you apply for one of our credit cards.
b. You’re not at least the age of majority in the province or territory you live in.
c. Your application is flagged for fraud prevention.
d. You have an existing Capital One account.
e. You’ve applied for a Capital One account in the last 30 days or had an account with us that was not in good standing in the last year. In good standing means not past due, over limit, fraudulent, restricted, or part of a consumer credit counselling program or bankruptcy.
In some cases, we may not be able to open an account for you even though your application was approved. This can happen if we’re unable to verify your identity, or you don’t provide the required security funds if you’re approved for a Secured Mastercard®.