How does income affect credit scores and credit limits?
When you apply for a credit card, one piece of information you'll be asked to supply is your annual income. Whether you get paid annually, hourly, by commission or by project, credit card companies ask for your income to help them assess your borrowing risk before they approve your application.
While a higher income may improve your chances of getting approved for a credit card, it's not the only factor credit card companies consider.
Why do credit card applications ask for annual income?
The Credit Card Accountability Responsibility and Disclosure (CARD) Act requires credit card companies to evaluate your ability to pay before opening a new credit card account or increasing your credit limit. While there isn't a specific income requirement for a card, evaluating your access to income allows a bank to determine your credit health and whether or not they want to lend you money based on their confidence in your ability to make your payments.
Types of income you can report on your application
If you're under the age of 21, you will need to provide your personal income, such as from a part-time or full-time job. You cannot count your parents' income unless they co-sign for the card, and you shouldn't count student loans because they aren't technically income, but rather, another form of debt. If you're over the age of 21, you can count any income sources for which you have “reasonable expectation of access" such as:
- Part-time or full-time jobs
- Alimony or child support
- Gifts or trust fund payments
- Social Security payments or pensions
- Retirement fund payments
- Investment income
Additionally, if you have access to another person's income, such as a spouse or partner, that person's salary may be considered on a credit card application. A good example of this is if you share a joint bank account with someone. If their paycheck is regularly deposited into your shared bank account, those earnings can be considered as part of your income.
Calculating your income
When calculating your income for a credit card application, it doesn't need to be exact. However, you should try to make your best estimate and it should be relatively close. Never lie, but don't stress if you don't have an exact number.
Some applications simply ask for general income, though others may have specific income requests such as:
- Gross income: The total annual income before anything (such as taxes and 401k) is taken out.
- Net income: This is your gross income, minus taxes and other expenses. Essentially it's what you take home in your paycheck, multiplied by the number of paychecks you receive each year.
- Monthly income: Your gross income divided by 12.
What is a good annual income for a credit card?
There's no specific annual income required to qualify for a credit card, especially because credit card companies look at many factors to help determine whether or not you qualify.
However, one thing to consider is your debt-to-income ratio (DTI), which helps determine your risk as a borrower. Here's how you calculate your DTI:
- Add up your estimated monthly income.
- Add up your monthly payments for all debts such as auto loans, student loans and mortgage.
- Divide your monthly debt by your monthly income for your debt-to-income ratio.
While there's no specific debt-to-income value required for approval, typically lenders look for a DTI of lower than 36%. Essentially you want this number as low as possible for the best chance of being approved.
Additionally, lenders may ask for information such as your checking and savings account balances, the amount of your mortgage or rent and information about your employer. This is all to help them assess your ability to repay.
How does my income affect my credit score?
Your income doesn't directly impact your credit score, though how much money you make affects your ability to pay off your loans and debts, which in turn affects your credit score.
"Creditworthiness" is often shown through a credit score. A credit score is a number between 300-850, and the higher your score, the better you look to potential lenders.
How does my income affect my credit limit?
Your income has a direct correlation with your credit limit. Annual income impacts your DTI ratio, which helps credit card companies determine your creditworthiness. The lower your DTI ratio and the higher your income, the higher your credit limit may be.
Alternatively, the higher your DTI ratio and lower your income, the lower your credit limit may be. That's because if you have a lot of debt but don't have a high income, you may struggle to pay off your debts each month.
In conclusion
Your income is definitely a consideration when applying for a credit card, but it's not the only factor. One of the most important factors is your ability to pay lenders back, and this is usually determined by looking at your payment history.
If your payment history is strong, you may be considered low risk. Creditors may be more willing to approve your credit card application and give you a higher credit limit. If your payment history is inconsistent or always late, you may be considered a high risk, and your limit may be lower.
When working to increase your credit limit, try to build a payment history over time that shows you consistently pay your bills when they're due. This may help prove to lenders that you can handle a higher credit limit.
You can also use Chase Credit Journey to check your credit score for free and help manage, monitor and protect your credit.
