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How to Calculate Net Annual Income for Credit Card Applications

When you apply for a new credit card, you’ll have to fill out a form that provides the lender with information about you and your financial situation.

One common question that card issuers ask is about your income.

Depending on how the card issuer asks for your income, it can be easy to get confused about which number you’re supposed to provide.

Here are the different types of income that card issuers may ask for and how you can calculate them.

Why You Need to Provide Your Annual Income

The simple reason that you have to tell card issuers your income is that it’s a legal requirement.

The CARD Act of 2009 mandates that card issuers ask for applicants’ income on credit card applications.

The law specifies that lenders can only offer loans to people who they are confident can pay back the loan.

The reality is:

Beyond it being a legal requirement, lenders have a vested interest in only lending to people who can pay those loans back.

Lenders make money when borrowers repay their loans and lose money when borrowers default. The more money that you make, the more that you have available to pay your credit card debt.

Card issuers also use your income information to decide what your credit limit should be.

Someone who makes $20,000 a year might get a $3,000 credit limit while someone who makes $200,000 a year could handle a limit of $25,000 or more.

Each card issuer has its own standards for the credit limits its willing to extend and the people its willing to lend to.

The income you provide is just one piece that lenders use when making a decision.

How to Determine Your Net Annual Income for Applications

When you apply for a new credit card, you’re allowed to include certain types of income in your application.

Anything that you have “a reasonable expectation of access” to should be counted, including:

  • Income from working
  • Gifts received
  • Payments from trust funds
  • Social Security and pension income
  • Investment income
  • Alimony or child support received

Sometimes, your lender will ask for a specific type of income on your application, meaning you’ll have to adjust the number accordingly.

Gross income

Your gross income is the sum of every dollar that you earn in a year.

This includes any money you make from working, investing, hobby income and anything else you do.

You do not subtract taxes or any payroll deductions.

Net income

Your net income is your gross income, minus things like taxes and payroll deductions.

The easiest way to think about this is thinking of it as your annual take-home pay.

Multiply the amount you receive from every paycheck and multiply it by the number of times you’re paid each year to find your net income.

Monthly income

Your monthly income is your gross income per month.

Find your gross income then divide it by twelve to find your monthly income.

Household income

Household income refers to all of the income that your household receives rather than just money that you make. If you live with another person and share financial responsibilities with them, you can include their income when calculating your household income. 

This is useful for partners with shared finances and married couples as it lets the partner who earns less access additional credit based on their partner’s income.

Note that adults under 21 who live with their parents should not include their parent’s income unless their parents cosign on the credit card.

Will You Have to Prove Your Income?

It can be tempting to lie on your credit card application, especially if you don’t make much money.

Higher income means a better chance of getting a card, so what’s the harm in fudging the numbers a bit, right?

It’s also easy to accidentally enter the wrong number when there are so many types of income you could be asked for.

Credit card issuers reserve the right to ask for proof of the income that you claim on your credit report. If you cannot provide proof of your income, the card issuer will reject your application and may close any other accounts you have with them.

Beyond asking for proof of your income, card issuers use things like income modeling, estimating your income based on your credit report and other known factors.

If you report an income far outside the card issuer’s estimations, it can increase the odds of being asked for proof.

Even though it can be tempting to inflate your income numbers to increase your odds of getting an account, you should never lie on a credit card application.

Lying on your application is fraud and can land you in jail or with heavy fines.

Other Factors that Play a Role

There are many factors other than income that impact your ability to open a new credit card.

Housing status and cost

Card issuers often ask about your housing situations and how much you pay for your housing. Typically, this means specifying whether you rent or own your home.

Lenders ask this question because housing represents a significant fixed cost.

You can’t stop paying your housing costs unless you want to wind up kicked out of your home. If your monthly income is $4,000 and your housing cost is $2,000, lenders will know that means you really only have $2,000 available to spend each month.

Typically, lenders prefer to lend to people who own their homes rather than rent and those who have lower housing costs.

Employment status and history

Lenders will usually ask for your employment information when you apply for a card.

Sometimes, they’ll ask for additional employment history. They use this information to confirm that you’re employed and to estimate your income.

For example, if you report an annual income of $5 million but say that you’re employed as a teacher, this might raise a red flag with the lender and prompt them to ask for proof of income.

Credit score and history

Your credit score is one of the most important factors in your ability to qualify for a loan.

Your credit score is based on how you’ve interacted with debt in the past, including your ability to make on-time payments and how much debt you currently have.

Credit scores range from 300 to 850 with higher scores being better. People with scores of 750 or more tend to qualify for the best cards and interest rates while scores under 500 or 600 have trouble qualifying for loans at all.

If you’re applying for a credit card, you want to do everything you can to boost your credit score.

Debt-to-income ratio

Your debt-to-income ratio measures your ability to pay your existing debts based on the amount of money that you make.

To find your debt-to-income ratio, divide your total debt by your annual income. The lower the resulting number is, the better it is.

You can reduce your debt-to-income ratio in two ways.

One is paying down your existing debts. This also boosts your credit score, giving your application’s chances an even greater boost.

The other option is increasing your income, which can be difficult to do.

If you pick up a side job to boost your income, make sure that you aren’t paid under the table. Lenders only look at aboveboard income when calculating your debt-to-income ratio.

Credit Cards for People with No Income

Many people want to have a credit card.

They’re an easy way to spend money without having to carry around cash and many credit cards offer rewards or other perks when you use them.

Look:

If you don’t have a source of income, it’s all but impossible to get a credit card.

Lenders don’t want to give you a loan unless you can pay it back and it’s hard to pay back loans when you don’t make any money.

If you really want to get a credit card, your best chance is to apply for a secured credit card.

These cards require an upfront security deposit, which becomes your credit limit. Many lenders will still refuse to give you a secured credit card if you have no income, but they’re your best chance.

If you don’t have any income, before you apply for a card, make sure that you plan to use it responsibly and have a way to pay the bill each month.

Using the card and not paying your bill will damage your credit, which can take years to repair. You’ll also be left with huge interest charges and late fees to pay.

Conclusion

When you apply for a credit card, lenders want to make sure that you have the income to pay your bill every month.

Knowing the different types of incomes that lenders ask for and how to calculate them will make it easier for you to provide the right information on your credit card applications, giving you a better chance of qualifying for a card.