Why the Fico Score Disregards your Income

The most commonly known tool in measuring a person’s creditworthiness is the FICO score – the rating calculated based on entries in their credit report at one of the major credit bureaus (Experian, Equifax, or Transunion). However, a seemingly major gap in this system is that the FICO score disregards your income. The reason for this apparent lack is actually very simple: the credit score attempts only to judge how reliably you have paid off your debts in the past, not whether you will have a large cash flow in the future in order to meet new obligations.

The FICO score, or Fair Isaac Corporation score, is a standard mechanism for producing a rating between 300 and 850 based on information contained in a person’s credit file. The major credit bureaus collect information on all sources of credit, like credit cards, bank loans, and mortgages: what corporation has extended the credit, the size of the loan, and whether payments were made on schedule. People with scores over 700 are considered to have generally good credit, and people near or over 800 have effectively perfect credit.

Late payments harm the score; the later the payment was eventually made (and particularly if it went to collections), the greater the penalty. Bankruptcy, obviously, results in the greatest penalty, but very small penalties are issued even for applying for new credit cards. On pre-established schedules, the credit bureaus erase negative information from a person’s file, typically after several years. As a result, provided that a person starts making their payments on time and limits their applications for new credit, their score should slowly climb upwards again. Very serious hits, like bankruptcy, will remain on file for seven years.

The information in the credit file which is used to calculate the FICO score, however, is just that: information about credit. The FICO score explicitly is not an attempt at estimating a person’s overall reliability, or their overall financial health. Instead, it is narrowly concerned only with how they have dealt with loans in the past, in order to guide potential new creditors in determining whether a person normally pays back their debts very conscientiously, or whether, instead, they have a lengthy history of dodging their obligations. Logically, if a person has never defaulted on a loan before, it is less likely that they will default on their next one.

At the same time, at least where large amounts of money are concerned (such as a home mortgage), intelligent lenders do realize that the FICO score takes into account only how a person has dealt with past debts. As a result, alongside the FICO score’s estimate of the person’s record of paying off their debts, they will also consider that person’s capacity to pay off debts in the future – in other words their income.

In practice, although some potential landlords, employers, banks, and creditors who routinely consult a person’s credit report and calculate their FICO score might appreciate having income factored in, there would probably be serious legal and privacy-related problems were the credit agencies to collect information on people’s income as well. In the meantime, it is important to remember that the FICO score disregards your income because it is explicitly concerned only with your track record for paying off debts, not with your estimated capacity to pay off new debts today or in the future.