When I sat down to write this article I found it difficult to come up with my opening paragraph, which is unusual for me. I almost structured it as another mythbuster piece, like the one I wrote last week, but then I decided against it. I concluded that the topic is so straightforward and simple that it didn’t require a clever prefix and could stand on it’s own as a series of questions and answers, like an interview but between me and, well, me. Enjoy…
John – Does your salary count in your FICO scores?
Ulzheimer – If you’re referring to the credit bureau based risk scoring models that we’re all familiar with then the answer is no, your salary does not count in your score.
John – I take it from your carefully worded answer that there’s more to this, yes?
Ulzheimer – When it comes to credit scoring questions, the answer is almost never as simple as “yes” or “no.” And, like most cases, the answer requires some context.
There are two primary reasons why your salary, net worth, assets, investments, or anything else that defines your worth are not counted in your credit bureau risk scores. The first is that your credit reports do not include your salary or any other metric that defines your “value.” They used to, but not for the past 20 years. Salary was purged from credit reports because it was provided by the consumer, which made it a highly unreliable figure. And if it’s not on your credit reports it can’t count in your FICO scores, plain and simple.
The second reason is that income is a measurement of capacity (your ability to pay your bills) not credit-worthiness (whether you’ll choose to pay your bills).
John – But doesn’t it make common sense that someone who makes more money is going to be a better credit risk?
Ulzheimer – I’m not arguing that it doesn’t make common sense. What I am saying is to assume that by comparing two people by their salary and awarding the wealthier person the “better credit score” crown would be improper. It assumes that doctors, lawyers, and professional athletes are all the best credit risks and people with entry-level jobs are the worst credit risks, which is simply incorrect.
John – So do lenders consider salary to be important?
Ulzheimer – That’s a stupid question John, of course they do.
“What’s your salary” is a question in every credit application I’ve ever seen. It varies in importance based on the type of loan you’re applying for. If you are applying for a credit card your income is not as important as it is for a mortgage application. A mortgage loan, which requires a $1,500 monthly payment, requires a certain capacity to pay in order for it to be plausible. I mean, if the most you can afford to pay is $500 per month, then giving someone a loan that requires three times that doesn’t make sense, even for the worst mortgage lender. Of course that didn’t stop mortgage lenders and consumers from lying about salaries a few years ago, but that’s a different topic for a different day.
John – Does your salary ever impact your scores?
Ulzheimer – Yes, it does. There are scoring models that take into account information from your applications. These are called, not surprisingly, application-scoring models. And since your income is going to be included on your credit applications it will have some influence over your application scores. But just to be clear, these are not your FICO scores. These are scoring models that reside with the lender, which you never see and probably have never heard of until just now.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.