Several factors determine your credit score, but salary and income are not among them. However, if you suddenly lose your job or other income sources, your score may suffer indirectly, as we’ll explain below. But first, let’s discuss how you get a credit score.
The Credit Score Story
FICO, the dominant player, created the first consumer credit scoring system in 1989. Others joined in, including the second-largest system, VantageScore. About 85% of consumer creditors use FICO, which has a scoring range of 300 (worst) to 850 (best).
The three major credit bureaus, Equifax, Experian, and TransUnion, collect monthly data from lenders, credit card companies, and other information suppliers regarding consumers’ use of credit and payment activity.
The bureaus record, tabulate, and disseminate the results through several products, including credit reports (which provide a 10-year history of your use of credit) and credit scores. Therefore, you have three reports and scores, one from each credit bureau. Slight differences among the three scores stem from differences in each bureau’s data collection and calculation methods. The average US credit score in 2022 is 716, a five-point jump over the past two years.
How Your FICO Score Is Tabulated
The FICO system uses five factors to calculate your credit score:
- Bill Payment History (35% of your FICO Score): Paying your bills on time is the most critical factor determining your credit score. Payments more than 30 days late are reported to the credit bureaus, which add the item to your credit reports, where it remains for seven years. Missed payments can drop your score by dozens of points. Even more damage occurs if you default on a debt, a bill collector is assigned to your account, your car is repossessed, your home goes into foreclosure, or you go bankrupt. Paying on time helps to support a good credit score.
- Credit Card Debt (30%): FICO measures your debt by calculating your credit utilization ratio (CUR), which is the amount you owe on your credit cards divided by your total credit card spending limits. CURs above 30% hurt your credit score, so you must pay down high debt balances to improve your credit.
- Length of Credit History (15%): FICO rewards you for managing debt successfully over the long term. It’s best to keep old credit card accounts open, so you don’t shorten your average account age.
- New Account Applications (10%): Whenever you apply for a new loan or credit card, the creditor will likely perform “hard” credit inquiries to get your latest credit reports and scores. Only you can authorize hard credit inquiries — all others are “soft.” Each hard inquiry reduces your score by a few points.
- Credit Mix (10%): You get a small benefit by having multiple types of credit and loans, such as credit cards, student loans, mortgages, personal loans, etc.
Income’s Indirect Impact
Although missing from the five FICO factors, income disruptions can hurt your score indirectly if you have trouble paying your bills and your debt levels rise. This is an excellent reason to put aside six months of expenses into an emergency fund, just in case you separate from your job.