What does annual net income on a card application mean?

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I’m trying to apply for a Walmart credit card. Can you tell me what does annual net income mean on the credit card application? – Alyssia

Answer

Dear Alyssa,
Annual net income is how much money you earn in a year after taxes and other deductions. It’s good that you’re asking this question now since the figure you list on the credit card application helps an issuer decide whether to issue a card to you, and for this reason you’ll want your net income to be correct.

Annual net income can be broken down as follows:

  • Annual: Since annual means year, if you are a salaried employee, this is your salary for a year. If you work by the hour, you can figure out how with a calculator how much you earn in a year. Enter your hourly pay and multiply it by the number of hours you work during the week. Then take that sum and multiply it by 52, which is the number of weeks in a year. For example, the annual pay for a $10-an-hour job that you work full time (40 hours per week) would be $20,800.

  • Net: This is how much you take home after everything is deducted from your paycheck. Gross income is the amount before taxes and any additional withdrawals. If you look at your pay stubs, you can see what is taken out from your gross pay. Among these are deductions for federal and state income taxes, Medicare and Social Security contributions, as well as any funds you’ve selected to go toward retirement or health care plans.

  • Income: This is how much you earn from your job, but this also can include other sources of income, such as spousal support, Social Security or disability payments, pension income, investment income, etc. Other forms of income also could be revenue from a business you own. Income even can include a promised stipend from someone else, such as a parent.

Assemble these words and you get “annual net income.”

Why would a credit card issuer be interested in that post-deduction figure and not your gross annual income? Because your net income is the amount of money you have available for living expenses. With it, you cover such essentials as housing, utilities, groceries and transportation, along with less vital costs such as entertainment and travel.

A credit card issuer will assess several factors to determine if you qualify for a credit card. The most important is your past credit history, which shows up on your consumer credit reports. If you’ve been a responsible borrower, especially over many years, your credit history (and therefore your credit rating) should be in fine shape.

Another credit qualification factor is net income, and the issuer may ask for either your monthly or annual take-home pay amount. Whatever the case, your net income should be stable and sufficient for you to meet your expenses as well as any estimated payments associated with the card’s charging limit. To illustrate, the minimum payment on a credit card with a $1,000 credit limit with a 17 percent APR would be around $25.

You may be able to handle that even with a small income. However, for a card with a $20,000 credit limit, the minimum payment would be more like $483. That would be too much if you have a part-time, minimum wage job.

The credit card issuer may or may not verify your income sources, but be honest. If you list a $10,000 monthly net income when it’s really $2,000, you may be granted a credit limit that you can’t handle. Not only that, listing fraudulent data on an application is illegal. Don’t do it.

Before you apply for any credit card, consider whether you’re likely to be approved. Access your credit scores to see what kind of rating you have. FICO and VantageScores are the most common scores, and they range from 300 to 850. You can pull your VantageScore and a free credit report at CreditCards.com.

Higher credit scores are preferable, as they indicate less lending risk. Make sure your income is steady and enough for you to manage your living expenses plus a little more.

See related: Do you list gross or net income on card applications?, What types of income qualify on a card application?

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Updated: 12-12-2018