Your credit score is an important number. The higher it is, the more likely you are to pass a credit check, get competitive rates on loans, and qualify for the best credit cards. There are also plenty of other ways it can affect your life. For example, in most of the United States, drivers with higher credit scores pay less for auto insurance.
Income isn't one of the factors used to calculate your credit score. However, research has found that low-income Americans are more likely to have lower credit scores -- and it's a shocking difference.
The average credit score for low-income Americans
Low-income Americans have a median credit score of 658, according to average credit score data gathered by The Motley Fool Ascent. The data comes from the Federal Reserve Bank of New York and Equifax. You can see how that compares to moderate-, middle-, and high-income Americans in the table below.
| Annual Income | Median Credit Score |
|---|---|
| Low income | 658 |
| Moderate income | 692 |
| Middle income | 735 |
| High income | 774 |
Data source: FRBNY Consumer Credit Panel/Equifax 2020Q2.
High-income Americans have a median credit score 116 points higher than low-income Americans. This makes a significant difference in mortgage rates, the likelihood of qualifying for rental housing, and the credit cards each group could get.
So, if income isn't a credit scoring criteria, why do people with lower incomes have lower average credit scores? The most likely reason is that a higher income makes it easier to follow good credit habits, including paying bills on time and avoiding excessive debt.
How to improve your credit score at any income
It's possible to have an excellent credit score, regardless of your income. To give you an example, my credit score was above 780 even when I wasn't making that much.
Fortunately, building credit isn't too complicated. It mostly just requires following a few credit-friendly habits month in and month out. Here are a few tips that can help you reach and maintain a high credit score.
Start tracking your credit
Before you can improve your credit, you need to know your current score. Thanks to online credit score tools, it's easier than ever to check this -- and it's free.
See if any of your credit cards offer free credit monitoring. Many credit card companies include this as a perk for cardholders. Here are a few examples of credit score tools with major card issuers:
- American Express: MyCredit Guide
- Capital One: CreditWise
- Chase: Credit Journey
- Discover: Credit Scorecard
All these provide your credit score, updated monthly. They also provide information about the factors affecting your credit score, so you know what to work on.
Always pay your bills on time
The biggest factor in your credit score is your payment history. When you pay bills on time, that has a positive impact on your credit score. If you pay late, it can cause your credit score to drop quite a bit.
It's worth mentioning that not all bills go on your credit report. Credit card and loan payments are generally the ones that affect your credit. Rent and utilities usually don't get reported on your credit history, so they don't impact your credit score. But it's still best to pay all your bills on time to maintain the habit. If you want to make this easier, consider setting up automatic payments.
If you can't make a payment, contact the creditor to see what your options are. You may be able to work something out, such as paying a smaller amount, to avoid having a missed payment on your credit history.
Pay down credit card debt -- or stay out of it entirely
There are a couple of negative consequences of credit card debt. It costs you money in interest every month, and interest rates are high. Let's say you have $5,000 in credit card debt. If your card has a 21.59% APR (the national average, according to Federal Reserve data), that would cost you about $1,800 in interest per year.
It can also hurt your credit score. The portion of your credit that you use is another key credit scoring criteria. If you have your credit card maxed out, or even if you've just used 50% of your credit limit, that will impact your credit.
If you don't have any credit card debt, do your best to keep it that way. Pay your credit cards off in full every month to avoid debt and interest charges. If you're currently in debt, pay as much as you can toward it. Also, look into balance transfer credit cards. These have a 0% intro APR on balance transfers, so you can refinance debt and save money on interest.
Managing money with a lower income is harder, and that can also make it harder to build credit. For long-term financial success, you may want to look into ways to increase your income. But improving your credit score is a goal you can achieve at any income if you pay your bills on time and avoid credit card debt.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.
