Income

Income summary: 

• Income can include several types of money or benefits, not just a paycheck from a job.

• When you apply for a new loan or credit account, lenders will ask you to share information about your income to see if you can afford the loan. 

• Income is important in consumer credit because it helps lenders decide how much money you can borrow.  

Income definition and meaning

Income is money or other compensation that is paid or given to you for work that you do, or from investments, pensions, public benefit programs, or other sources. Some types of income are:

• Wages or salary from a job

• Payments from contract work

• Interest income from a savings account 

• Dividends and interest from investments

• Pension payments for retired people

• Unemployment benefits

• Rents earned from rental property

Key concept: Money or other compensation paid or given for work, or from investments, pensions, public benefit programs, or other sources. 

More on income

Income ties into several areas of personal finance. If you want to apply for a loan or a credit account, the lender will want to know your income and verify proof of income. Income is also important for determining how much tax you owe to the IRS or state authorities. 

Income sets the limits for your budget, could help you decide how much you can save, and often determines your options for things like housing, healthcare, and education.

Types of income 

When you apply for a loan, lenders will typically ask you to provide information about your various sources of income, so they can decide if you can afford to repay the loan. Not all types of income are included on loan applications. 

Here are a few common types of income that lenders ask for on a loan or credit application: 

• Employment income. This could be any pay you receive as an employee, full-time or part-time. Employment income can include salary, wages, tips, bonuses, and commissions. 

• Self-employment income. If you own a small business or work as a freelancer, gig worker, or independent contractor, you might have income earned from your self-employment, business, or side hustle. 

• Investment income. This could include dividends from stocks or brokerage accounts, interest earned from savings accounts or CDs, or coupon payments from bonds.

• Retirement income. This is money from Social Security, pension payments, annuities, or other retirement account withdrawals.

• Insurance payments. If you receive ongoing payments from an insurance policy or insurance fund, such as long-term disability insurance or workers’ compensation insurance, this money could also count as income on a credit application.   

Get to know about the types of income that lenders ask for, so you’ll be more prepared for your next credit application. Include any income sources that might help prove that your finances show you can handle a new loan.

Income: a comprehensive breakdown 

Lenders ask for information about your income when you apply for credit. Here are a few reasons why income is important for your credit and your everyday life as a consumer and borrower: 

• Income should be verifiable. If you’re applying for loans like a home mortgage, lenders will typically ask to verify your income, usually by providing recent paycheck stubs or tax returns.

• Income affects how much you can borrow. When you apply for a loan, a lender will usually want to know your income so they can calculate your debt-to-income ratio (DTI). This is a measure of your income you spend on debt. You can find your DTI by adding up all your monthly debt payments, then dividing that number by your monthly income. If more than about 35% of your income is going toward other debts, lenders could be reluctant to lend you more. Your income could also affect the credit limit that you are offered on credit cards. 

Income, along with your credit score and credit history, is a big part of getting approved for new credit accounts and loans. Lenders need to feel confident that you have a steady, sufficient income. They also want to know that your income is strong enough to give you enough room in your budget to comfortably afford another debt payment. 

Income helps people afford the necessities and comforts of life. Sometimes income gets interrupted, declines, or goes away. If you’re struggling with financial hardship because your income has taken a hit due to job loss or medical problems, you might need professional help with debt relief.