When you apply for a credit card, the credit card issuer will ask you for your annual income. They want to be sure you have the means to pay your bills on time. Issuers may ask you to calculate your income in specific ways. For example, they may ask for net income or gross income when filling out an application.
If you’re single and work a salaried job, this may be fairly easy to figure out. However, for many people, income can be complicated and comes from a wide variety of sources. It also might be shared with a spouse.
Here’s a look at what you need to know about what annual income means on a credit card application, and how to know what types of income to include if you have multiple sources.
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What Counts as Income?
For the most part, any money that is paid to you directly and that you have reasonable access to counts as income. This includes money you received from an employer or, if you’re self-employed, from clients. It can also come from other sources, such as investments or retirement benefits. Note that income tends to vary by age, and it is not the same as net worth.
The following are some examples of types of income credit card issuers may consider:
• Salary and wages
• Commissions
• Tips
• Bonuses
• Income from a spouse or partner
• Pension benefits
• Social Security benefits
• Public assistance
• Alimony and child support payments that you receive
• Interest
• Dividends
You may not have to include alimony or child support payments as income on a credit card application. The reason? Credit card issuers understand that those payments may already be earmarked for the support of an individual.
Recommended: What’s the Difference Between Income and Net Worth?
What Is the Difference Between Gross and Net Income?
When it comes to calculating income, it’s helpful to know what gross income and net income mean.
Your gross income is the total amount of money you make before any other deductions are taken from it. Deductions may include things like taxes, 401(k) contributions, and health insurance premiums. Your gross income represents income from all sources.
Your net income, on the other hand, represents how much money you have once all deductions have been made. For individuals, this is their “take-home” pay, which can be considerably smaller than gross income. Credit card issuers may ask for net income as it represents money that you can access and isn’t earmarked for other purposes.
Tools such as spending apps can help you organize and manage the money you earn.
How to Calculate Your Gross Annual Income
Calculating gross income is relatively simple. You’ll need to add up income from all sources. For tax purposes, this will include wages, tips, bonuses, commission, capital gains, dividends, alimony, pension payments, interest, and rental income. You can find your adjusted gross income by subtracting above-the-line tax deductions, such as contributions to 401(k)s and traditional IRAs.
Credit card issuers can look at other income that’s not necessarily taxed, such as life insurance payouts of gifts. So be sure to include that in your calculation for a credit card application.
How to Calculate Your Annual Net Income
Calculate your net income by taking your gross income and subtracting deductions, including taxes, such as income taxes, capital gains tax, and employment taxes. You’ll also need to subtract contributions to retirement accounts and insurance premium payments.
If you receive a paycheck, there may be a line that spells out net income.
Recommended: How to Calculate Your Net Worth and Wealth
What Types of Income Don’t Count on a Credit Card Application?
There are some types of income that you can’t include on a credit card application. Generally, these are forms of income that you don’t have access to. For example, if your wages are being garnished to pay off a debt, you cannot include that amount of the garnished wages as income, as that money belongs to your creditor. Similarly, you can’t include money that goes toward alimony or child support payments or that you need to use to pay off tax debt.
What Happens If I Lie About My Income on a Credit Card Application?
It may be tempting to fudge your income on a credit card application. After all, tacking on a few thousands dollars to your income may be the difference between being approved for a credit card and being rejected. That said, you should never lie about your income on a credit card application. If you do, you’re committing fraud, and it’s a federal offense. So while it may not seem like a big deal to give your income a little boost, if you’re caught, you could face up to 30 years in prison and a fine of up to $1 million.
What Other Information Does a Credit Card Application Require?
In addition to income, you can expect a credit card issuer to ask for the following information on a credit card application:
• Legal name and a valid U.S. address
• Housing costs, which help the issuer determine how much debt you can afford to pay back
• Your Social Security or Individuals Taxpayer Identification Number, which is needed for the credit card issuer to make a hard pull on your credit report to check your credit score
Issuers consider your credit score when they determine whether to extend credit to you. A high credit score shows lenders that you have a history of responsibly managing debts and paying your bills on time. Lower credit scores indicate that a borrower is less likely to make on-time payments, and lenders may be less likely to approve them for a card.
The best way to maintain a healthy credit score is to always pay your bills on time. You can receive a free credit report each year from the three major credit reporting bureaus: Experian, TransUnion, and Equifax. Check your credit report regularly to ensure there are no mistakes that could be dragging down your score. Report mistakes to the credit bureaus immediately.
The Takeaway
Credit card companies look at your annual income to determine how much credit you can afford and to assess their risk in extending you credit. Some may specify how they wish you to calculate your annual income, frequently asking for gross or net income. Gross income is the total amount of money you make before any other deductions are taken from it. Net income represents how much money you have after deductions have been made.
To calculate either figure, you’ll need to gather information about all your income sources. A money tracking app can help you keep tabs on your finances. The SoFi app connects all of your accounts in one dashboard so you can get a bird-eye view of your finances, track income and spending, and monitor your credit score.
FAQ
What does it Mean when a credit card application asks for annual income?
Credit card companies may specify how they want you to report your annual income. They may ask for gross income, which includes all income before taxes and deductions, or net income, which is income after taxes and deductions have been subtracted.
What counts as annual income?
Annual income includes all money that you can say you reasonably have access to. This typically includes salary and wages, commissions, tips, bonuses, income from a spouse or partner, pension benefits, Social Security benefits, public assistance, alimony and child support payments, interest, and dividends.
What doesn’t count as annual income?
You cannot include income that you don’t have access to, such as garnished wages, alimony and child support payments you’re required to make, or money that must be used to pay off tax debt.
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