Credit Myth #4: You Need To Be Wealthy To Have an Excellent Credit Score
Despite popular belief, wealth (or lack of it) has absolutely no bearing on your credit score — at least not directly. Rather, your credit score all depends on how you manage both your debt and your income.
Factors That Do Affect Your Credit
Credit bureaus do not care about how much money you make — rather, they just care about your ability to effectively manage your debt. When calculating your score, they review factors related to debt management, including your payment history and debt usage. In fact, payment history and credit utilization are the two biggest factors the bureaus consider.
Debt usage refers to the amount of debt you have in relation to available credit. The lower the utilization rate, the better, as it tells the reporting agencies that you do not rely on credit to maintain your lifestyle. An ideal credit utilization rate is 30% or lower.
How Income Can Help
Though the credit bureaus do not factor in your income when calculating your score, your income can indirectly impact it. For instance, lenders typically look at borrowers’ incomes when determining loan amounts. A person who earns a substantial amount each month will likely receive a higher limit than someone who earns an average or less than the average wage. This gives the borrower more room to spend before hitting the 30% utilization threshold.
Additionally, individuals with a higher income may not have trouble paying their bills on time each month. Timely payments are the number one factor the credit agencies consider, so in regard to ease of bill-pay, more wealth can help.
Individuals with lower incomes may also use their credit cards to pay for emergency expenses, bills and other necessities. Using credit to pay for day-to-day expenses and emergencies is one of the worst things a person can do. Not only is it an indicator that he or she is living beyond his or her means but also, using credit to "catch up” is one of the quickest ways to fall behind.
Wealth Doesn’t Always Mean Great Credit
Just because wealthy people have an easier time paying off their debt doesn’t mean they all have great credit scores. In fact, many wealthy people have terrible credit scores or no credit at all. This is because wealthy people are notorious for underutilizing credit or doing the exact opposite — maxing out their credit limits and then forgetting to pay the loans off. Because they don’t need credit, wealthy people also tend to let errors slide.
At the end of the day, your credit score boils down to how
you manage your finances. If you live within your means, use your credit
responsibly and pay your bills on time, you’re sure to achieve and maintain an
excellent credit score.