Why the Fico Score Disregards your Income

Your Fico credit score is a vital figure which is hard to get away from as so much emphasis is placed on it in so many areas of life, from your employment prospects to your chance of obtaining a mortgage. Yet when your Fico score is compiled the algorithm used considers neither your income nor your assets. Many people find it rather strange that income has no relevance to the Fico score.

The Fico score is basically an assessment of how likely a risk you are, and if it is probable you would default or make good on loan or credit card payments. Thus income is not taken into consideration as having a high income is no guarantee you will handle repayments responsibly, just as having a low income bears no relation to your responsibility to make payments on time.

There are many people with high incomes who are totally irresponsible when it comes to handling their finances, living on credit with their assets mortgaged to the hilt. This may well be reflected in their credit score which shows a high debt ratio. At the same time there are many on lower incomes that have always been responsible and paid their bills on time, and they may have a high Fico score which reflects this.

The Fico score is used for far more than obtaining a credit card. It is used in consideration of mortgages, auto loans, bank loans, and credit agreements. A lender who relies solely on the Fico score to determine lending is short sighted if income is not taken into consideration as well, as it would be patently absurd to extend a loan where the monthly repayments take up the bulk of someone’s monthly salary. At the same time a person who has a high level of savings and not accustomed to using credit may be turned down for a loan as their credit score may be none existent.

At the opposite end of the scale many sub prime lenders take no consideration at all of the credit score, instead relying on typical monthly income. Payday lenders for example take no account of your past payment history as consider it unreflective of how you would deal with future accounts, and the fact that you have an income is more relevant to them than your past credit dealing.

Thus the Fico score is only one part of the responsible lenders decision to extend credit at all, yet some lenders will simply turn the person down who has a bad Fico score, regardless of income or assets. Where both income and the Fico score are considered together then often the Fico score has a high influence on the level of interest rate you will be charged, with those with high scores scoring the preferential rates. Lenders who do rely solely on the Fico score are making rash decisions.