Key takeaways
- When applying for a credit card, income is a crucial factor in determining creditworthiness, and it can be reported as net or gross income.
- Income can include traditional wages, as well as other sources such as side gigs or independent income.
- It is important to calculate your net income and debt-to-income ratio accurately when reporting income on a credit card application.
- Other information typically required on a credit card application includes personal details such as address and employment information.
When you apply for a credit card, income is one of the factors creditors use to determine your creditworthiness. You’ll be asked to list your income on your application, although the type of income that card issuers ask for can vary depending on the issuer.
Income can also vary and doesn’t necessarily need to be traditional wages. Learn more below about what to put for your total annual income on a credit card application and how to accurately report your income.
What is annual net income?
Credit card issuers often use different phrases to ask for your total annual income for a credit card on an application.
Some credit card issuers will ask specifically for your net income, which is the amount of money you bring home in your paycheck after taxes, health insurance premiums and retirement contributions are taken out.
Others may explicitly ask for your gross income.
The difference between your net income and your gross income is simple. Your annual net income is how much you bring home in your actual paychecks after deductions are taken out, while your gross income is how much you earn before deductions and taxes are taken out.
If you apply for the Chase Freedom Unlimited® card, for example, they’ll ask for your “total gross annual income.”
Your gross income may be easier to calculate. It could be the annual salary you agreed to when you accepted your job. If you are paid an hourly wage, on the other hand, you may need to figure out your gross income using last year’s tax return or by multiplying your gross weekly income by the number of weeks you work within a year.
What counts as income?
Income doesn’t have to include only traditional wages reported on a W-2 form from an employer. In fact, there are multiple different types of income that issuers allow you to report when giving your total annual income.
Your income data gives issuers another data point (in addition to the information on your credit report) to determine your ability to keep up with credit card payments before they approve your application.
Depending on the card you’re applying for, the issuer may give details about which specific income types you can use on the application form. Here’s a more general look at what income sources you may use:
- Personal income: Wages you receive as a full-time or part-time employee or money you earn via self-employment or contract work
- Allowances and gifts: Money that someone else deposits into your accounts regularly
- Social Security income: As well as regular withdrawals from retirement accounts
- Non-taxable income: Public assistance, disability payments, worker’s compensation and child support may be reported as income
- Income from others: Money that you use for living expenses, such as a partner or spouse’s income (this applies to applicants 21 and older)
- Scholarships or grants
- Money earned from investments
However, if you’re between ages 18 and 21, you may only report your independent income on your application. Even if you’re still a dependent under a parent or guardian, only the income you personally make will count toward your reported income.
How much income do you need for a credit card?
The amount of income you need to qualify for a new credit card depends on several factors, including the specific card you’re applying for, your net or gross income amount and your debt-to-income ratio.
How to calculate your net income
Start with the annual salary you earn in your job, minus deductions from your paycheck such as taxes and retirement contributions. You can find this information listed on the tax return you filed last year. Alternatively, look for your net income per pay period on your most recent pay stub, then use that figure to determine your annual salary.
Say your take-home pay is $600 per week after taxes, retirement contributions and premiums for health insurance. Your estimated annual net salary would be $31,200 ($600 per week x 52 weeks = $31,200) if you work every week in the year.
Additional sources of income, like those listed above, can also count toward your annual net income. If you have a side gig that’s separate from your regular salaried income, for example, you can also include those earnings.
How to calculate your debt-to-income ratio (DTI)
Your DTI ratio is a measurement of how much debt you owe compared to your annual income. This is a factor in your creditworthiness since two people with the same income could have different amounts of debt. Your DTI is determined as a percentage of the monthly gross pay you put toward repaying your debt, bills and other monthly payments. See below:
Debt-to-income ratio example
You can calculate your DTI with this forumla: Debt / income = DTI.
For example, if you have $1,000 in car loan debt but make $5,000 in income monthly, then your debt-to-income ratio would be 20 percent. Wells Fargo reports that any DTI under 35 percent is considered “good.” After you’ve determined all your income sources, you can add the net annual income you already calculated together with any additional income and list this amount on your credit card application.
Why you should never lie about income in a credit card application
No matter how much you may want to qualify for a new card, you should never lie on a card application.
Knowingly listing false information on a loan application, which includes credit card applications, is considered identity fraud. Fraud is a federal crime with substantial consequences.
Why do credit card applications inquire about your income?
Credit card issuers ask for your income on your application because they need to be sure you can repay your debt. While exact approval criteria for credit cards is considered proprietary information, they typically look at your income, your credit score and other factors to determine a general idea of your creditworthiness.
Beyond protecting their own interests, issuers must determine whether the applicants they approve have the financial means to repay what they borrow under the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act of 2009).
Specifically, the Act states: “A card issuer may not open any credit card account for any consumer under an open-end consumer credit plan, or increase any credit limit applicable to such account, unless the card issuer considers the ability of the consumer to make the required payments under the terms of such account.”
The bottom line
Income is an important part of what you report to issuers on an application for one of the best credit cards. Exactly what makes up that income may differ. Some may ask for the actual sum of money you bring home before deductions and taxes are taken out (gross income) or after (net income).
Take the time to provide an honest estimate. It is never a good idea to exaggerate your income. But also make sure you list all eligible income sources — such as side hustle income or income from part-time work — to improve your chances of being approved.
Frequently asked questions about credit card income
Read the full article here