Credit 101

Will a Pay Cut Hurt My Credit?

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Income isn’t reported to credit bureaus, but your paycheck can still have an impact on your credit standing. Still, you don’t need to get nervous about what a pay cut (or raise) will do to your credit score, because there are ways to manage the effects of such a change.

How Income Impacts Credit

Your salary does not show up on your credit report, but it touches many of the important factors that determine your credit score, like whether or not you can make loan payments and how much debt you have. While it may seem like someone with a large paycheck would have an easier time paying bills than someone who earns very little, that’s not always the case.

Whether you make six figures or minimum wage, you have to focus on living within your means. It can be extremely challenging, but as far as credit goes, it’s crucial to having a good credit score. If you have any loan payments, make sure you make them on time, and if you use revolving credit (like a credit card), do your best to use as little of your credit limit as possible (30% or less), because timely payments and debt use have the largest effect on your credit score. There are five main components of credit scores, which all consumers should know and understand.

Another thing to note about income and credit: Your salary may not be part of your credit report or credit score, but it’s often part of a credit application. Some loan products require borrowers to have a debt-to-income ratio below a certain percentage, and credit card issuers will want to know how much you make before issuing you a credit limit.

Manage Your Cash Flow Wisely

If you find yourself making less money than you had been previously, one of your first action items needs to be adjusting your budget. Adjusting your standard of living comes with a lot of challenges, but continuing along an unsustainable path of spending will be much more difficult to deal with when it turns into a pile of debt, collections accounts and a damaged credit score.

There are all sorts of budgeting tools available for free, and it’s easy to get started once you think about your financial goals and re-evaluate your needs. Budgeting isn’t just for salaried workers, either — here are some tips for managing your expenses with an irregular income.

A change in cash flow requires extra attention to your bank accounts, as well as a close eye on your credit. Check your credit standing regularly to make sure your new financial situation doesn’t have an adverse effect on your credit scores, because poor credit can limit your access to loans and credit cards as well as hike up interest rates on those services. You can see your credit data for free every 30 days at Credit.com, and if you notice a sharp drop in your score, take that as a sign something needs to change.

More on Credit Reports and Credit Scores:

Image: AndreyPopov

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