3 Financial Moves to Make After Getting a Raise

by Maurie Backman | Updated July 25, 2021 - First published on Jan. 22, 2021

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Scored a higher paycheck? Here's how to make the most of it.

Not everyone has been fortunate enough to get a raise this year. In fact, some people may start the new year with a lower paycheck because their hours were cut. But if your paycheck is looking more robust than ever, here are a few important moves to consider.

1. Apply for a mortgage

If you've been eager to get a home loan but held off because your income wasn't high enough, now could be your chance to get approved. As a general rule, mortgage lenders want to see you're not spending more than 28% of your gross monthly income (your income before taxes and deductions) on housing. If your recent pay bump allows you to qualify for the loan you need to finance a home in your target neighborhood, it's worth applying. Especially as interest rates on mortgages are unbelievably low right now.

Of course, your income is only one of several factors lenders will look at. Other factors include your credit score, your existing level of total debt, and the assets you have. The more money you have in savings, for example, the better a lender is likely to feel about loaning you money. But if you can check off those other boxes and were previously held back by a lower wage, then it could pay to apply for a home loan again -- this time with a higher paycheck.

2. Refinance an existing loan

It's not just mortgage rates for new homes that are competitive today. If you refinance an existing loan, you might also snag an extremely competitive interest rate on your home loan. And the higher your income, the more likely you are to get approved for a refinance.

That said, as with a regular mortgage, your income is just one piece of the puzzle. If your credit score is poor and you've racked up a lot of debt, you may not get approved to refinance your home loan. But if those factors won't be an issue, you could lower your interest rate by refinancing. Not only could you lower your monthly mortgage payments you could also save plenty of money over time.

3. Get a higher spending limit on your credit cards

The higher your income, the more likely you'll be to get approved for a higher spending limit on your credit cards. And that could, in turn, improve your credit score.

One factor that goes into calculating your credit score is your credit utilization ratio, which measures the amount of available credit you're using relative to your total credit limit. If you're able to raise your credit limit, your utilization ratio will drop, which is good for your score.

However, a higher spending limit can also drive you to spend more recklessly and dig yourself into debt. If you're going to request a higher limit on your credit cards, pledge to only use it for true emergencies -- don't just go on a shopping spree.

A higher paycheck could improve your financial picture as a whole. It pays to consider these moves if you're looking at a raise this year. And if none of these action items apply to you -- say, you're not a homeowner or aren't looking to buy, and your credit score is already in great shape -- then simply saving a chunk (or all) of your raise is also a smart goal.

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