Does Taking a Pay Cut Hurt My Credit?

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Income isn’t generally reported to credit bureaus, but that doesn’t mean a shrinking paycheck can’t have an affect on your good credit. If you start missing debt obligations as a result of a less money coming in, you’re credit score can suffer.

And what about changes to your credit limit? Could a change in income from retirement or taking a lower salary impact how much credit card issuers are willing to extend to you?

“Every creditor has debt criteria for limits and terms, but I’ve never had a discussion with anyone who experienced a credit limit decrease because of a salary change,” Bruce McClary, vice president of communications with nonprofit National Foundation for Credit Counseling, said.

Likewise, Thomas Nitzsche, a spokesman for Clearpoint, another counseling service, said he’s never run into that situation.

“While it would certainly make sense for creditors to lower a limit based on income, I don’t have any firsthand experience of clients reporting this,” he said.  “We do see lowered limits when a client’s score begins to slip and during the recession we saw creditors lower limits and increase minimum payments across the board, but I cannot say that we have seen the same happen when clients self-disclose a lower income.”

Several credit card issuers did not immediately respond to questions about lowering credit limits because of salary decreases, but most issuers retain the right to lower your credit limit at any time. For example, the member agreement for the Chase Freedom credit card (you can find a full review here) states “We may cancel, change or restrict your credit availability at any time.”

Remember, a lower credit limit could hurt your credit score, since credit utilization (the amount of debt you owe versus your total available credit) is a major factor among credit scoring models. You might not be able to avoid a reduction in credit card credit limits, related to a pay cut or otherwise, but, fortunately, there are plenty of things you can do to ensure your credit score doesn’t take a hit.

Here are a few tips for managing your credit with a lower income.

1. Live Within Your Means

Whether you’re making six figures or minimum wage, living within your means is key to keeping your credit score in good shape. If you find yourself making less, adjusting your budget can be key to doing that so you avoid missing payments or defaulting on debt.

It’s a good idea to review your monthly expenditures and figure out where your money is going. If you aren’t already doing so, you can start tracking your spending, then you’ll know what to cut. It’s also a great time to start making coffee at home, cook homemade meals, and cut non-essential monthly costs like subscriptions.

2. Create a Budget, or Adjust the One You Have

Adjusting your standard of living comes with a lot of challenges, but reducing your spending is much easier than dealing with a pile of debt, collections accounts and a damaged credit score.

Creating or altering your monthly budget can help, and it’s easy to get started once you think about your financial goals and re-evaluate your needs.

3. Keep Current on Monthly Bills

For the monthly bills you can’t cut out — like loans, credit cards and utility bills — it’s important to keep current on payments so you can stave off any credit dings. Keeping your credit utilization below 30%, and optimally 10%, is also important.

4. Hold Off on Applying for New Credit

While your income isn’t typically part of your credit report or score, it is most often included in a credit application. Some loan products require a certain debt-to-income ratio, and credit card issuers will want to know how much you make before issuing you a credit limit. Remember that hard inquiries can result in a drop in your credit score, so it’s important to know where your credit stands so you don’t apply for cards or other credit you’re unlikely to qualify for. You can check your credit scores for free every month on Credit.com to see where you stand.

If you’re already saddled with debt and are dealing with a drop in income on top of that, you could consider a balance-transfer credit card or debt consolidation loan to help ease your monthly obligations.

At publishing time, the Chase Freedom credit card is offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

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