Credit myth: Debt to income ratio affects credit score

Debt to Income ratio

Faith, Fraud & Minimum Wage (Photo credit: Wikipedia)

Debt to Income Ratio does not Affect your Credit Score

One of the things that fascinates me about the credit scoring system is how much of it flies in the face of common sense.  Shouldn’t how much debt you have as compared to your income be the most important factor in your dependability to repay your debts?  If someone were borrowing money from me that would be the first thing I would want to know.  If they just got a big raise that would affect my willingness to lend.  But it just doesn’t work that way in the credit scoring system.

FICO doesn’t know or care about that nice raise or bonus you just got.  If you get a nice raise the best way to improve your credit score fast for most people is to pay down their credit card debt as fast as they can.  This has an immediate effect on your credit score effective on the reporting date of your next statement.  Reporting dates are normally right after the statement closes for the month.  This will be 2-4 days after the due date.  Watch out for charges to your card during this 2-4 day period if you want the lowest balance possible reported each month.

Why does Debt to Income not Matter to FICO?

FICO’s computers run on formulas referred to as algorithms.  These algorithms are designed based on research into the predictability of repayment based on hundreds of factors.  All of these factors involve past behavior.  Many people with high incomes are not proven to be trustworthy to repay debt.  A high flying wealthy person may lead a lifestyle that keeps outgrowing his money no matter how much he makes.  The minimum wage worker may be meticulous about living within his means and paying on time no matter what the hardship.  Many minimum wage worker’s have higher credit scores than people who make enviable salaries.  FICO scoring may be counter intuitive at times but to their credit they do treat everyone the same.  Let’s give them their due on that point.  It’s just that their logic leaves me scratching my head at times.

For a Mortgage Application Debt to Income Ratio Matters a Lot

As important as the applicant’s credit score is to a banker or mortgage lender  they are also interested in a person’s ability to repay.  Good intentions are not enough for them.  They will look beyond the past as reflected in the credit score to see what the present ability to repay is as well as what the foreseeable future looks like.  To them your expenses and salary are just as important as your credit score

fico doesn’t know or care about that nice raise or bonus.



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