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Consumer Trends

Does lower income imply bad credit? Study says ‘no’

Only 43% of consumers with annual incomes below $50,000 have subprime credit, according to ABA data

Summary

A study demonstrates that, perhaps surprisingly, a lower income does not directly imply bad credit.

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Many of us know that credit scores are categorized into tiers based on how risky a borrower seems to card issuers and lenders.

But what may surprise you is that lower-income individuals don’t generally have lower credit scores.

According to a new report from the American Bankers Association (ABA), which cites data analysis by Verisk Financial, the correlation between income level and credit score is quite weak. In fact, a majority of low-income individuals have credit scores that are prime or super-prime.

Subprime scores are defined as those below 680, and Verisk found that only 43% of individuals with household incomes below $50,000 have a score in the subprime levels.

Meanwhile, more than a third of those with sub-$50,000 household income (35%) have prime scores of 680 to 779, and almost a quarter (22%) have a super-prime score of 780 or better.

Verisk calculated the correlation between risk score and income at just 0.16, which is positive, but just barely. This indicates that the correlation is minor and that other factors have far more impact on risk scores.

Analysis in the ABA’s “The Benefits of Credit Card Rewards” report draws on a nationally representative depersonalized sample of approximately 16 million customers who have at least one active-balance credit card. The findings report was released on June 23.

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