11 Easy Ways to Improve Your Credit Score on a Low Income

Moving on from the multiple intricacies surrounding your CIBIL score, the common question arises: “Does income directly or indirectly impact my credit score?”

The truth is that income is not a relevant factor in the calculation of your creditworthiness. However, broadly speaking, your income can possibly have an indirect impact on your credit score. Read on to learn why.

What is the information included in the credit report?

Your detailed credit report includes your debt accounts, payment information, lender information, and many other important details related to your credit activity. It does not include your income information, marital status, race, or religion.

1.      Personal Information

➢      Full Name

➢      Date of Birth

➢      Contact details and addresses, both current and previous

➢      Identification numbers

➢      Employment details

2.       Credit Accounts and Payment History

➢      Lender Name

➢      Credit Limit and Loan Amount

➢      Current balance and usage

➢      Payment history

➢      Account type and status

3.      Credit inquiries

➢   Hard and soft inquiries

4.      Collection accounts and public records

➢      Collections and public records like bankruptcies, tax liens, etc.

So, can you improve credit score on a low income? The answer is clear—yes.

What is the indirect impact of income on your credit score?

Income is definitely not a direct factor in your credit score. It isn't even mentioned in your credit report—but it does have an indirect impact. It is not a decisive factor, but its impact can be categorized as the “capacity measurement."

If you have a consistent, stable, and healthy income, you will find it easier to manage your budget and your repayments appropriately. It will also help you be approved for loans, especially big-ticket loans like home loans.

If you surpass the minimum income thresholds, banks are more likely to approve your credit card application. A higher credit limit is synonymous with a higher income.

For example, as a general rule, banks set your credit limit at 2x to 3x your monthly income. If you have a high salary and a long and consistent history of on-time payments, you might be eligible for premium credit cards with a credit limit of 4x to 6x your monthly income.

Higher income signifies a greater repayment capacity, which means lenders are reassured about your repayments.

1. Income and Creditworthiness:

Higher income or even income stability may boost your ability to borrow, as creditors will need to ensure that you have enough funds to deal with additional liabilities. There are income thresholds set by credit card companies when they offer specific cards.

2. Payment Record:

 The prompt repayment of credit card debts and loan EMI repayments are among the crucial components of a good credit history, as missing payments may reflect poorly on your credit score. Avoid defaults when you are trying to improve credit score on a low income.

3. Credit Card Utilisation Ratio:

This ratio shows the amount of credit you use compared to the total amount of credit you have.

4. Credit card tiers and limit:

 Income also impacts your credit limit and credit card tiers. When it comes to premium credit cards, the income threshold becomes a bit more important than a credit score. Even with a higher credit score, your application for a premium credit card may be rejected because of a lower income.

How does income affect credit limit?

This can be explained using the concept of the debt-to-income ratio.

Your income, either salary or monthly earnings, cannot be considered a credit score. Just because your income is high does not necessarily mean that your credit score will be high; neither does it imply that with low income your credit score will be bad. Your credit score depends on data provided by the credit report, which takes into account factors like payment history, outstanding balances, and recent applications for credit.

Now, you need to consider the lender's perspective on income and debts. Here, the lender would want to know not just your income level but also your income level relative to your debt obligations.

For instance, TransUnion CIBIL gives estimates about the income level that help lenders to evaluate the income and debt level of a customer and his ability to repay.

Hence, even though your income level is high, if the debts you owe are considerable, you are still different in terms of credit risk compared to people whose income suffices their debt obligations. Similarly, your moderate income level can keep your credit score healthy by taking care of loans and credit cards properly. This is important to know when you want to improve credit score on a low income.

Income = your financial capacity to repay.

Credit score = your demonstrated credit and repayment behaviour.

Therefore, income can matter significantly when a bank evaluates loan or credit-card eligibility and affordability, but it should not be presented as if a higher salary automatically increases the credit score. Neither does it affect your credit score when you try to improve credit score on a low income. The credit score and income work together as different pieces of the borrower’s overall financial profile.

11 ways to improve credit score on a low income

Having a low income doesn't necessarily mean you're out of the competition for creditworthy borrowers. With consistent financial habits, you can build a good credit history on a limited monthly budget. This way, you can improve credit score on a low income.

1.      Check your credit report.

Start by reviewing the details of your credit profile and report. Check your loans, credit cards, outstanding balance, payment history, and personal information for errors. Raise a dispute for any incorrect information immediately. This helps you improve credit score on a low income.  Checking your personal CIBIL score doesn't lower it because it is a soft inquiry.

2.      Get a secured credit card

If your income or credit history makes it difficult to qualify for a regular card, getting a secured credit card is an option. It is also safe to improve credit score on a low income since it is backed by security or collateral, which keeps you stress-free regardless of your monthly budget.

3.      Become an authorised user

If you know someone you trust, you can choose to become an authorised user on someone else’s card. It's important to ask the authorities or card issuer whether your status is reported to credit bureaus and how that arrangement will benefit and affect you, if at all.

Read More: Ways to build credit as a first-time borrower

4.      Pay Bills on Time

If you have EMIs or credit card bills, make payments by their due dates. Make payments in full and remember not to pay only the minimum due.

Set reminders or enable automatic payments when required, as it is humanly possible to miss or forget a due date. This helps improve credit score on a low income.

5.      Maintain account age.

Maintain your older credit cards and accounts because open accounts preserve precious credit history for the lenders to evaluate. This helps improve credit score on a low income.

6.      Take affordable credit.

You do not need to borrow more money simply because you want to add more accounts to your credit history. The creditworthiness rule is to keep your credit activity natural. Before accepting a loan or credit card, check if its repayment plan fits your existing monthly budget. Lenders evaluate your responsibility rather than your capacity for borrowing.

7.      Pay your debt.

When there is an outstanding debt already, then try to pay down the debt slowly without any unnecessary loans. Make sure that you fix a practical amount that you can repay from your income monthly. In addition, making payments on the credit card balance ensures you don't have to pay unnecessary interest on existing balances.

8.      Optimise credit utilisation ratio.

Credit utilization rate is the amount of money that you utilize in terms of your total credit card limit. In addition, keeping the card balances small compared to the available limit means better-controlled credit utilization.

9. Maintain credit mix.

The credit profile may include various forms of borrowing, like credit cards and installment loans.

A soft reminder to keep your credit mix natural and maintain a gap between new applications. Do not strain your finances and budget simply because you want to create a credit mix.

10. Avoid multiple applications.

Think carefully before applying for any new loans and credit cards. Rather than applying to multiple financial institutions and hoping that some will accept you, compare the qualifications required for each loan and apply only for credit that you truly need. You don't want multiple hard inquiries on your credit profile.

11. Build history without spending extra. 

Note that raising your credit score doesn’t have to involve unnecessary expenditure. Add a simple recurring monthly bill to your credit card rather than making extravagant purchases. This is a good way to improve credit score on a low income.

Conclusion

Income might look like a decisive factor in credit score calculation. The truth is that CIBIL doesn't count income as a calculating factor of credit score. It does have an indirect impact on a few credit-related things.

Although a lower income reduces your borrowing power and caps your credit limits, it in no way prevents you from developing an excellent credit score and establishing a robust credit history. Lenders evaluate your responsible management of what is given to you rather than how much financial capacity you have. Therefore, you can improve credit score on a low income, achievable through patience and smart financial management.

FAQs

1. What are the factors that are used to calculate credit score? 

●       Payment history: 35%

●       Credit utilisation ratio: 30%

●       Credit history length: 15%

●       Credit mix: 10%

●       New credit and inquiries: 10%

2. Does income affect my credit score?

Credit reports do not consider your salary, bank balance, or property. However, income might linger as an indirect influence on your credit profile.

3. What are the requirements for a premium credit card?

Bank requirements for a premium credit card qualification are:

●       High-income salary

●       Excellent credit score

●       Existing bank relationship

●       Low debt-to-income ratio

●       Consistent on-time payments

4. What are the ways to improve my credit score on a low income?

Some simple steps to improve credit score on a low income are:

●       Pay on time and in full.

●       Maintain a low credit utilisation rate, less than 30%

●       Get a secured credit card.

●       Automate small bills

●       Avoid frequent applications

●       Create a credit mix

5. How long does it take to improve a credit score on a low income?

●       Minor Bounce Back (1 to 3 Months): Paying down your credit card debt or addressing errors on your credit file will make a difference in your score in just 30 to 90 days.

●       Good Score Increase (6 to 12 Months): Establishing a track record using a secured card or timely monthly payments will increase your score by 50 to 100+ points in 6 to 12 months.

●       Severe Problem Resolution (18 to 24+ Months): Getting rid of serious prior issues like late payments or default will take 12 to 24 months of perfect payment performance.