How do Jobs Affect a Credit Score?

Common sense might say that having a job affects your credit score, because without one you probably cannot pay bills. The credit bureaus do not care about your employment status, just about your ability to pay your debts. This might be the most important aspect of your financial profile.

Identification

During the 1960s, the credit reporting bureaus kept tabs on a consumer's employment status and might use a job or lack thereof to deny and approve credit. As of 2011, the credit scoring model does not account for salary or if the person has a job. Two mains reasons spurred this change. The bureaus cannot accurately find out about all of a person's jobs and salary and the Fair Credit Reporting Act makes it illegal to report income. How could, for example, the bureaus verify dividend income? Also, credit score models calculate a person's willingness to repay a debt, not if he has the ability to pay. Creditors would rather lend to a person making $20,000 a year who pays all of his bills than a millionaire who ignores debts.

Debt-to-Income Ratio

A job affects a ratio that usually takes precedence over a credit score: monthly debt to monthly income or debt-to-income ratio. When debt payments eat up more than 36 percent of your monthly income, most lenders do not believe that you can handle any more debt. Also, creditors usually review an employment history. If you do not claim a job or income, the lender may assume you have no way of paying a debt, even when you have a high credit score.

Considerations

Most lenders use the Fair Isaac Risk model as part of the loan application process, but some creditors use an alternative formula that factors in income, called an application-scoring model. The Fair Credit Reporting Act cannot stop a lender from incorporating income into a scoring model. You must include income on a credit application, so if the lender employs an application-scoring model there is no way to avoid an application score. Thus a raise or new job with a higher salary before shopping for a loan usually improves approval rates.

Tip

Hopping from job to job usually decreases your chances of receiving a loan, because a lender might consider you a flight risk or fear that you could have long periods of unemployment that cause missed payments. If you have no job, at least make the minimum payments on your accounts while looking for work and avoid adding new debt accounts to your profile. This will keep your credit history healthy so you can apply for new loans when you do get a job.