How Different Types of Bank Accounts Affects Your Credit Score
Most people know that opening a new credit card account or applying for a mortgage affects their credit score. But did you know that, while it’s rare and situational, opening and closing other accounts — like checking and savings accounts — can also impact your credit score?
Once you know how different types of accounts affect your credit score, you can take smart steps to properly open and close accounts for the best possible impact on your credit score. A little knowledge can help you take charge of your credit and lead you down a path toward financial well-being.
Checking Accounts and Credit Scores
When you go to open a new checking or savings account, your financial institution may look at your credit report, but typically it makes only a soft inquiry, and the effect on your credit score is nil. Other times, but not as often, your bank may make a hard inquiry, which can negatively affect your score, but usually not by more than five points.
While most people need a checking account to manage their everyday financial affairs, it has little to do with their credit score. Routine actions such as making deposits, writing checks, withdrawing funds and transferring money do not get reported to the credit bureaus, nor do they affect your credit score. Even overdrafts don’t impact your score, provided you pay the overdraft fees and take care of any negative balance before the bank takes action.
Closing a checking or savings account doesn’t affect your score either, as long as you don’t have any outstanding issues. It can only hurt your score if you close the account with overdrafts or negative balances, so you should bring your checking and savings accounts into good standing first before closing them. Credit scores are mainly based on borrowing activity, serious delinquencies and public records. So, in most cases, you can confidently open and close bank accounts without fear of doing damage to your credit score.
Credit Cards and Your Score
You can safely open one or two credit accounts without hurting your credit score, as long as you use them responsibly. When you first open a new credit card account, your credit score can take a 1% to 2% hit. Even though the credit inquiry that gets generated when you apply for a new credit card account will stay on your credit report for two years, most credit scoring models will factor it into your score for roughly only the first three to six months. Assuming you continue to use your credit card accounts as per usual, you can expect to see your score return to where it was relatively quickly. It makes good fiscal sense to monitor the movement of your credit score up and down the entire time with easy-to-use tools on your smartphone or computer.
A large portion of your credit score is based on your debt-to-credit ratio, or how much total debt you have compared with how much total credit you have available. Ideally this is 30% or less; lower is better. When you open a new credit card or two, your total credit increases, and if you don’t start charging a lot on your new credit cards, your total debt stays the same, so your debt-to-credit ratio decreases, which in turn helps boost your credit score.
Closing a Credit Account
Canceling or closing credit card accounts can be a little trickier. You should know the potential consequences first before deciding to close an account. For example, consider how long you’ve held a card. The length of your credit history is a factor in calculating your credit score, so if you hold only a few cards and get rid of your oldest one, your credit score could be reduced as a result.
You shouldn’t close an account to try to erase negative information related to that account. Closing a credit card account that you’ve missed payments on won’t improve your score. Your history with that card stays on your credit report for years, even after it’s canceled. Finally closing your credit card could increase your debt-to-credit ratio by reducing your available credit portion of the calculation. So you’ll want to think about how many other cards you have, your total debt, and total available credit left on the remaining cards before closing accounts.
Mortgages: More Help Than Hindrance
When you first take out a mortgage, your credit score may dip temporarily until you prove you can make the payments. This can take about six months. Make on-time mortgage and other bill payments every month to bring your score back up. You may not want to apply for any other credit during this time.
Knowing the ideal time to apply for any additional loans and how that can affect your credit score is possible with SmartCredit’s suite of tools that that teach you all about your score before you apply. It shows you how your score moves when you pay or you spend, and how to add points to your credit score faster.
When it comes to paying off your mortgage, it won’t affect your credit score much. The action will stay on your credit report for about 10 years as a closed account in good standing. In that period of time you likely will have continued to help your credit score by making other on-time payments on car loans and other loans, so the effect of paying off the mortgage should not negatively influence your score.
Be a Credit Score Warrior
You don’t have to idly sit by, watching your credit score tick up and down. And you don’t need to enlist the help of a professional advisor to act on your credit score. Instead you can be proactive and take charge yourself. There are several resources out there to help you keep an eye on things. For example, SmartCredit’s ScoreTracker, ScoreBuilder* and ScoreMaster tools can help you learn all about your credit score and create a plan to resolve any inaccuracies. Becoming your own credit score warrior is an advantage when it comes to improving your overall financial well-being.
*This feature unlocks if you have negative credit data.