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Why Didn’t My Credit Score Go Up After I Got A Huge Raise?



Question: Right before Thanksgiving, I got moved to a new job with my company. It came with a big fat raise. I mean, HUGE. So I checked my credit score with TransUnion like said, and it wasn’t any higher. Does it take awhile for the raise to get listed? Or are those credit bureaus intentionally delaying this so they can get more money out me?

— Micky in Utah

Howard Dvorkin CPA answers…

Credit scores might look like simple three-digit numbers, but what goes into them is what’s complex. That’s where mistakes, myths, and conspiracy theories arise.

One myth is: “The more I earn, the better my credit score.” That is simply not true, and for good reason.

What’s is a credit score?

A credit score is not based on how much money you have. It’s based on how much debt you owe. That makes sense when you really think about it. If your bank account is bulging with $1 million but your credit cards, mortgage, and auto loan total $2 million; then why would anyone lend you more money?

That’s all a credit score really is, by the way. It’s a prediction tool for lenders. It gives them a good idea — although no guarantee — that you will repay a loan made to you on time and in full.

How Income Influences Credit Score

Income is not directly reflected on your credit report so, there is no direct bearing on your score. How you manage income and the financial behaviors stemming from it, greatly affect credit health. A stable income allows for timely bill payments and better debt management, both crucial for a good credit score. Effectively leveraging your income can support a robust credit profile.

That’s why a middle-class person with no debt is more valuable to lenders (and let’s face it, to the success of our country) than a rich celebrity who blows all their money on parties, clothes, cars, and jewelry. It’s also why the five factors that go into your FICO credit score don’t include “income.”

Instead, they’re payment history, debt owed, length of credit history, new credit, and type of credit used. So if you haven’t used your raise to pay off your credit cards or make an extra car payment, your credit score is unaffected.

As for the credit bureaus making money, they do that mostly by charging lenders for your credit information, so they can make wiser decisions. Credit bureaus will also offer you services for credit monitoring and identity theft for a small fee, and while those services can be excellent, I suggest you shop around first for the best deal.

If I can be self-promotional for a moment, has partners who offer these services at the best prices I could find. So you may want to check them out.

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Income Stability and Its Role in Credit Health

How Stable Income Boosts Credit Confidence

A steady income not only helps in managing ongoing expenses but also reassures lenders about your loan repayment capability.

Stable income is a critical factor in financial planning and debt management, which directly impacts credit confidence. Here’s how consistent earnings contribute to greater confidence in managing and maintaining a good credit score:

  1. Predictable Financial Planning: With a stable income, individuals can plan their finances with greater certainty. This predictability allows for the strategic allocation of funds towards various financial obligations, including timely credit payments. When creditors and lenders see consistent and reliable payment histories, it elevates their confidence in your financial responsibility, thus improving or maintaining a healthy credit score.
  2. Debt-to-Income Ratio Management: One of the key factors lenders look at when considering credit applications is the debt-to-income (DTI) ratio. A stable income helps maintain a low DTI ratio, making it easier to acquire new credit under favorable terms. When your income is predictable, you are less likely to overextend credit relative to your earnings, which is a common reason for credit score decline.
  3. Enhanced Ability to Absorb Financial Shocks: Financial stability thanks to a consistent income stream means being better equipped to handle unexpected expenses without compromising your credit obligations. For example, if an unforeseen medical expense arises, having a stable income allows you to manage this without defaulting on other financial responsibilities, thereby preserving or even boosting your credit score.
  4. Better Opportunities for Credit Utilization: Credit utilization – how much of your available credit you’re using – is a significant component of your credit score. Individuals with stable incomes are more likely to use their credit judiciously and pay it off consistently, which is viewed positively by credit bureaus. Lower utilization rates generally correlate with higher credit scores.
  5. Confidence to Engage with Financial Institutions: A stable income not only enhances your ability to manage credit effectively but also boosts your confidence in engaging with lenders and negotiating better terms for loans and credit lines. When you know you have a reliable income, you are more likely to take proactive steps towards securing favorable financial products, which can include competitive interest rates and better loan terms.
  6. Long-term Financial Health and Planning: Over time, stable income contributes to long-term financial health, enabling more consistent investment in avenues that further strengthen credit scores, such as mortgages that are paid on time. This ongoing financial stability and disciplined payment history are key to boosting credit scores and overall financial confidence.

Challenges of Variable Income

People with fluctuating incomes face unique challenges in maintaining a consistent credit score.

Variable income can significantly complicate how one handles credit, potentially leading to adverse effects on credit scores if not managed prudently. Here’s a deeper look at these challenges and their impact on credit health:

Challenges of Variable Income on Credit Score

  1. Inconsistent Payment Capacity: One of the primary difficulties posed by variable income is the inconsistency in financial capacity from one month to the next. This can lead to missed or late payments on credit obligations, such as credit card bills or loan installments, which are detrimental to credit scores. Payment history is a major factor in credit scoring, and even a few late payments can cause a significant drop.
  2. High Credit Utilization: During lean periods, individuals might rely more on credit cards to bridge gaps in cash flow. This increased reliance can lead to higher balances and, consequently, a higher credit utilization ratio, which is the second most significant factor affecting credit scores. Credit utilization—how much credit you are using compared to your credit limits—should ideally remain below 30% to avoid negative impacts on your credit score.
  3. Difficulty in Financial Planning: The unpredictability of income makes it challenging to forecast financial status and plan accordingly. This lack of financial planning can result in suboptimal management of credit and debt, leading to decisions that may not only strain finances but also weaken credit health.
  4. Impact on Loan Eligibility: Lenders assess an applicant’s income stability when deciding on loan approvals and terms. Variable income can be viewed as a risk factor, making it harder to secure loans. Those who are approved often face higher interest rates or less favorable terms, which can further strain their financial stability and affect their ability to maintain a good credit score.
  5. Accumulating Debt during Low Earning Periods: Without a stable income, it’s common to accumulate higher levels of debt during periods of reduced earnings. The debt might not be as easily paid off during better earning periods, leading to accumulated interest, increased debt burden, and potentially derogatory marks on credit reports if payments fall behind.
  6. Challenges in Building Emergency Funds: Building and maintaining an emergency fund is crucial for weathering periods of low income without resorting to excessive credit use. However, variable income can make it difficult to set aside money consistently, which means credit cards or loans might become a fallback during emergencies, negatively affecting credit scores.

Strategies to Mitigate These Challenges

Addressing these challenges requires strategic planning and disciplined financial management. Here are some strategies that can help:

  • Prioritize Building an Emergency Fund: Aim to save a part of your income during peak earning periods to build up an emergency fund that covers at least 3-6 months of expenses. This can cushion the blow during lean periods and help avoid high credit utilization.
  • Keep Credit Balances Low: Even if using credit cards during lower-income months, try to pay down balances as quickly as possible to keep your credit utilization ratio low.
  • Regular Monitoring of Credit Score: Keep a close eye on your credit score and report. Regular monitoring can help you understand the impact of your financial actions on your credit and enable timely interventions to prevent damage.
  • Flexible Budgeting: Use a flexible budgeting approach where spending is adjusted based on your income fluctuations. Allocate more funds towards debt repayment during months with higher income.
  • Communication with Creditors: If you anticipate difficulty in meeting payment obligations, communicate proactively with creditors. Many are willing to work with you to arrange payment plans that won’t harm your credit score.
  • Diversify Income Sources: If possible, seek to diversify your income streams to stabilize overall earnings. This might involve balancing freelance projects with part-time work or passive income streams that provide more consistent cash flow.

By effectively navigating the challenges posed by variable income, individuals can maintain better control over their financial health and safeguard their credit scores, even in the face of income unpredictability.

Timely Payments and Credit History

Regular, on-time payments are perhaps the most straightforward way to enhance one’s credit score.

Income plays a crucial role in shaping one’s ability to make timely payments, which in turn significantly impacts their credit history. Understanding this relationship is vital for maintaining good financial health and a strong credit score. Here’s an expanded exploration of how income influences these areas:

How Income Affects Timely Payments and Credit History

  1. Capacity to Meet Payment Deadlines: The most direct way income affects timely payments is through the sheer ability to pay. Regular and sufficient income ensures that there are enough funds available to cover all due bills and credit obligations by their due dates. Missing payments due to insufficient funds can lead to late fees, penalty rates, and negative entries on a credit report, all of which harm one’s credit score.
  2. Consistency in Payment History: Credit scores are significantly influenced by payment history, which accounts for about 35% of the score according to FICO. A consistent track record of on-time payments indicates to lenders that the borrower is reliable and less of a risk. Higher and stable income levels make it easier to establish and maintain this type of consistency, thereby positively impacting one’s credit history.
  3. Avoidance of Accumulating Debt: Adequate income also helps individuals avoid excessive reliance on credit for everyday expenses, reducing the likelihood of accumulating debt that cannot be comfortably managed. When income is insufficient, people may resort to using credit cards for daily living expenses, leading to high balances that are hard to pay off. High outstanding debt can decrease your credit score, particularly if you exceed 30% of your credit utilization ratio.
  4. Financial Flexibility to Address Unexpected Expenses: A stable and adequate income provides the financial flexibility needed to manage unexpected expenses without jeopardizing credit obligations. For instance, if an emergency occurs, such as a medical issue or urgent home repair, having a stable income allows you to cover these costs without having to delay or miss payments on other commitments. This financial resilience helps maintain a clean and positive credit history.
  5. Enhanced Loan and Credit Opportunities: With a good income and a history of timely payments, individuals are often eligible for better loan and credit offers. Lenders and credit institutions view them as low-risk borrowers and are therefore willing to offer larger loans, lower interest rates, and more favorable repayment terms. This not only reflects well on one’s credit history but also improves credit access and financial growth opportunities.
  6. Strategic Financial Management: Higher income doesn’t just cover costs; it also allows for strategic financial actions like additional principal payments on debts, which can shorten debt lifespans and reduce the total interest paid. Such strategies are favorable for credit scores and history as they demonstrate financial prudence and capability.

Strategies to Leverage Income for Better Credit Management

Given the importance of income in managing credit, here are strategies to leverage even fluctuating or lower incomes for optimal credit health:

  • Budget Rigorously: Implement a strict budget to prioritize essential payments, such as debts and bills, to ensure they are always covered first.
  • Set Up Automatic Payments: Use automatic payment facilities to ensure that payments are always made on time. This is particularly useful for fixed expenses like mortgage or car loans.
  • Maintain an Emergency Fund: Consistently allocate a portion of income to an emergency fund to cover three to six months of living expenses, protecting against the need to miss payments during financial downturns.
  • Regularly Monitor Credit: Keep an eye on your credit report to understand how your financial behavior affects your credit score and to ensure there are no inaccuracies that could impact your credit history negatively.
  • Seek Professional Advice: If income is irregular or budgeting feels overwhelming, consulting with a financial advisor can help set up a plan to manage finances and payments effectively.

By understanding and acting on the relationship between income and timely payments, individuals can maintain a robust credit history, ensuring they remain appealing candidates for credit and loans, which can be crucial for financial stability and growth.

FAQs on Income and Credit Score

Does a higher income guarantee a better credit score?

While higher income provides financial flexibility, it doesn’t guarantee a better credit score without responsible financial behaviors.

Can improving my credit score increase my earning potential?

Indirectly, a better credit score can facilitate higher investments and broader financial opportunities, potentially leading to increased earnings.

What is the minimum credit score for a good mortgage rate?

This varies by lender, but generally, scores above 700 are considered good for obtaining favorable mortgage rates.

How can I maintain a good credit score with fluctuating income?

Strategies include maintaining a budget, building an emergency fund, and using credit wisely.

Does paying off debt immediately improve my credit score?

While it can reduce your debt-to-income ratio, the timing and type of debt repayment also affect your credit score.

Empowering Yourself Through Financial Knowledge

Understanding and improving your income and credit score are fundamental to achieving financial stability and accessing the best opportunities in life. Armed with the knowledge you can take actionable steps towards better financial health and a brighter economic future.

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