You might think making a lot of money can automatically grant you access to the best interest rates on things like mortgages, credit cards, auto loans and more. But that’s not true.
When it comes to borrowing money, “credit score is usually king,” J.R. George, senior vice president at Trustco Bank, tells CNBC Make It.
Put bluntly: Is it possible to have an income high enough to make your credit score irrelevant? “Absolutely not,” George says.
Higher earnings can certainly help you attain good credit, but only if you’re managing your money and debt payments wisely.
Here’s why a good credit score is almost always more important than your income.
Good pay doesn’t mean good habits
Your credit score on its own doesn’t say much about your income. Because it’s based on your borrowing behavior and history, as well as your ability to manage debt, you can have good credit on a low income or bad credit on a high income.
No matter how much you earn, you can damage your credit history by making late payments on debt or other bills.
“Someone who makes a million dollars a month and doesn’t pay their $20 Verizon bill or their $20 credit card bill — for whatever reason that happens — that can turn into a significant amount of problems for the bank,” George says.
In extreme cases, “that’s an indicator that if we make a car loan to this person, most likely we’re going to end up repossessing this car.”
When applying to borrow money for any reason, you’re pretty much guaranteed to face a credit check, George says. But your income isn’t always given the same weight.
“Every lender is a little bit different — it may depend on [the] loan amount, it may depend on the score — but a lot of times, proof of income may not even be required,” George says. “But if you’re applying for a loan, every single time you need a verified credit score that the lender is obtaining themselves.”
You’re unlikely to find a lender who only considers your income and not your credit score, he adds.
To improve your credit, look for ‘low-hanging fruit’
If you want to improve your credit score, start by pulling your credit report at least once a year to look for what’s hurting your score.
“Look for anything that is low-hanging fruit, anything that you have that you’d be [surprised] at,” George says.
Even if you’re confident in your payment history, you might find an old bill you missed that wound up in collections, George says. You could also find inaccurate information or fraudulent accounts dragging down your score.
These are relatively easier to fix than a missed payment or bankruptcy, which stay on your credit report for seven and 10 years, respectively.
After clearing your credit report of any errors or fraud, you can take other steps to help improve your credit. First and foremost, aim to pay your bill on time every month and pay down any outstanding balances.
There are also tools like Experian Go, which allow you to use your utility, cell phone and streaming subscription bills to help improve your credit score.
If your credit score is really low, it may make sense to look into secured credit cards. With this type of card, you put down a cash deposit that typically functions as your credit line. Then, you spend and pay back the card like you would a traditional credit card.
Secured cards are typically more accessible to people with poor credit — making your payments on time helps you rebuild it. However, these cards may offer lower credit limits and fewer rewards, so it’s important to do your homework first to see if they’re right for you.
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