We receive thousands of consumer questions, feedback and thoughts about credit scores through our myFICO.com portal. I would be a wealthier person if I had a dollar for every time I have heard … “there is no way my score is this low because I make a lot of money!”
It seems like a plausible assumption, right? Consumers with higher incomes should have more money to consistently pay their bills on time and, thus, be better credit risks. Does that reasoning also imply that consumers with lower incomes are deemed higher risk? As it turns out, that reasoning doesn’t hold water for either income group.
First, it is important to understand that FICO® Scores do not consider a consumer’s income, since verified income is not available on a credit report. The score assesses how consumers manage their credit obligations based only on their credit history, independent of income. Research by FICO Labs shows that millions of consumers with lower incomes demonstrate a keen ability to manage their credit responsibly. Likewise, millions of higher-income consumers become over extended on their credit, miss payments and pose high risks to lenders.
Our research shows that FICO® Scores are much better than income at predicting credit repayment risk. The graph below shows how FICO® Scores more effectively rank-order future risk compared to self-reported income. In other words, we see much higher default rates for people with the lowest FICO® Scores (the riskiest borrowers), and progressively fewer defaults for people with higher scores (consumers who are less risky). By contrast, the income line in the graph stays relatively flat, showing that default rates for low-, medium- and high-income consumers are about the same.
Income is obviously still important for lending decisions. It just doesn’t do the work that a good predictive measure like the FICO® Score can.