Credit Cards

Why Do Credit Cards Ask For Income

Why Do Credit Cards Ask For Income

Credit cards are indispensable in today's world, allowing you to make purchases and live life on-the-go. But have you ever wondered why credit card companies ask for your income before approving your application? Are they just being nosy or is there a logical reason behind it? In this article, we will delve into the world of credit cards, understand why they ask for your income, and how it affects your chances of getting approved for a card. So, let's get started!

Income is a measure of your financial health

Income is one of the primary factors that credit card companies use to assess your creditworthiness. Essentially, they want to know if you have the financial means to repay the money you borrow through the credit card. A higher income generally signifies a greater capacity to repay debt, which reduces the lender's risk.

Income affects your Credit Utilization Ratio

Your Credit Utilization Ratio (CUR) is calculated as the amount of debt you have divided by your total available credit. Lenders typically use this ratio to gauge how well you're managing your credit. By taking into account your income, credit card issuers can ensure that you're not being granted access to more credit than you can handle, which helps in maintaining your credit score.

How to calculate your Credit Utilization Ratio?

To calculate your CUR, divide your total credit card balances by your total credit card limits and multiply by 100 to get a percentage.

CUR = (Total Credit Card Balances / Total Credit Card Limits) x 100

A lower CUR, ideally below 30%, is preferred by lenders as it indicates responsible credit usage.

Income helps to determine your Credit Card Limit

The credit card company uses your income to determine your credit limit, which is the maximum amount you can borrow at any given time. They want to ensure that you can comfortably pay back the credit without any financial strain. If you have a higher income, you might be eligible for a higher credit limit - but remember, a higher limit also means a greater responsibility to manage your spending wisely.

Proof of income prevents fraud

Fraudsters may try to use false information to obtain credit cards that they never intend to pay off. By requiring proof of income, credit card companies add a layer of protection to prevent fraudsters from taking advantage of their services. This helps in maintaining the integrity of the credit industry.

Why Do Credit Cards Ask For Income Example:

Jane applies for a credit card from XYZ Bank. During the application process, she is asked to provide her annual income. Jane earns $60,000 per year, which helps XYZ Bank determine whether she poses a low risk of defaulting on her credit card debt.

Once they verify her income, XYZ Bank assesses her credit utilization ratio and credit history. Since her CUR is below 30% and she has a solid credit history, bankruptcy, or late payments, XYZ Bank approves her for a credit card with a limit of $10,000.

Jane now has access to a credit card that meets her financial needs and lifestyle, thanks to her verified income.

Now you know why credit card companies ask for your income - to assess your financial health, determine a suitable credit limit, and prevent fraud. Understanding how income plays a role in the credit card application process will not only ease your worries but also help you make informed decisions regarding credit card applications. Don't forget to share this insightful article with your friends who might be applying for credit cards soon! Meanwhile, feel free to explore other intriguing personal finance guides on Flik Eco to improve your financial knowledge. Happy reading!


About Jermaine Hagan (The Plantsman)

Jermaine Hagan, also known as The Plantsman is the Founder of Flik Eco. Jermaine is the perfect hybrid of personal finance expert and nemophilist. On a mission to make personal finance simple and accessible, Jermaine uses his inside knowledge to help the average Joe, Kwame or Sarah to improve their lives. Before founding Flik Eco, Jermaine managed teams across several large financial companies, including Equifax, Admiral Plc, New Wave Capital & HSBC. He has been featured in several large publications including BBC, The Guardian & The Times.

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