A credit score is an integral part of your financial status that influences your creditworthiness and borrowing limit. A high credit score means you can borrow more, while a low score means you can only borrow a limited amount.
So, if you wonder whether opening a checking account can affect your credit score, the quick answer is, checking accounts usually have minor effects on your credit score.
However, opening a checking account can affect your credit score when your bank looks at your credit report and makes a hard inquiry, when you sign up for overdraft, or when you overdraw your checking account without replenishing it.
This guide provides more details about how a checking account can affect your credit score.
How do checking accounts affect your credit score?
There are various types of credit scores, and lenders use a variety of different types of credit scores to make lending decisions. Below is a comprehensive overview of how opening a checking bank account can affect your credit score. Let’s get started!
1. Making a Hard Credit Inquiry
Occasionally, when applying for a checking account your bank or credit union will run a credit check, but it doesn’t happen all the time. It’s just one way that your bank can choose to evaluate your financial history.
According to Experian, “information about assets such as checking account balances, savings account balances, certificates of deposit, individual retirement accounts, stocks, bonds or other investments” are not listed in your credit profile.
When looking at your credit report, your bank can make either one of these inquiries—soft inquiry or hard inquiry. A soft inquiry doesn’t affect your credit score. This is because a soft credit pull is not tied to a potential loan or line of credit. Soft credit inquiries are viewed differently since there isn’t a chance that you have a new credit account in the process of opening. But, a hard inquiry can impact your credit score.
A hard credit inquiry, also known as a hard pull, occurs when your bank checks your credit report before approving your request for a checking account. During the process, your bank assesses things like your payment history and debt to income ratio.
Each time a credit issuer pulls your credit report, your credit score can drop between one and five points. This drop is relatively insignificant for the bigger picture, but still worth noting.
However, if you have a high frequency of hard inquiries occurring within a short time, your credit score drops significantly. To make matters worse, inquiries stay on your credit report for two years. This could potentially affect your ability to borrow money or open a checking account if lenders and financial institutions consider you a high-risk client.
So, what’s the bottom line? In reality, credit inquiries have little effect on your credit score. A problem arises when you have too many of them. So, it’s best to limit the amount of credit you apply for.
2. Signing Up for Overdraft Protection
Overdraft protection helps in many ways, including clearing checks and other financial transactions when your account has limited funds. It’s convenient and helps you avoid missing payments or returned checks.
However, overdraft protection may trigger a hard inquiry because it’s considered a line of credit. Your bank may want to look at your credit report before approving your request for the feature.
As we’ve already discussed, your credit score drops between one and five points every time someone makes a hard inquiry to assess your credit report. You can avoid this by skipping the overdraft protection option when opening a checking account.
3. Overdrawing Your Checking Account
If you don’t have overdraft protection in place, unpaid or repeated overdraft fees, or you fail to replenish your account, your credit score may be affected by overdrawing your checking account.
Many banks work with debt collection agencies and hand you over to collections if you have unpaid overdraft fees.
Debt collection agencies, in turn, can report your details to credit bureaus if you fail to pay your debts. The last thing you want is to be reported to the three credit bureaus, (i.e., Experian, TransUnion, or Equifax), though because that’s one way to have your credit score drop.
Will my credit score affect my ability to open a bank account?
Your credit score probably won’t affect your ability to open a new checking account. Banks and credit unions rarely look at your credit score when you open a checking account. But if they do, they mainly check your credit report (including your credit history), though this typically doesn’t impact the approval.
What else do banks look at?
Now that you know that your credit score isn’t a significant consideration, you’re probably wondering about the other factors banks consider when approving a checking account application.
ChexSystems is a consumer reporting agency that tracks your banking history. Most financial institutions look at your ChexSystems report to see how you’ve managed past bank accounts.
If you’re in ChexSystems, you won’t be able to open checking or savings accounts at most banks. However, you can still open a bank account at a bank that doesn’t use ChexSystems or at a second chance bank.
A bank may also want to ensure you meet the following requirements when opening a checking account.
- Be of legal age—18 years and over or share an account with a legal guardian.
- Have a Social Security card.
- Have a U.S.-based home address.
However, you should always keep an eye on your credit score. Even though it doesn’t affect your ability to open a checking account, it is an excellent indicator of your financial health. Plus, you always want to know where you stand with creditors.
Things That Will Affect Your Credit Score More Significantly Than a Checking Account
There are other factors that affect your credit score more than opening a new checking account.
Late payments hurt your credit score, and it gets worse if you have a lot of them. Creditors examine your payment history more than anything else when assessing your creditworthiness. This helps them determine whether you can repay the debt on time.
As a result, you should have minimal or no late payments to protect your credit history. According to an Experian report, late payments account for 35% of the FICO score—the credit score used by 90% of lenders.
Credit Utilization Ratio
The credit utilization ratio is responsible for 30% of your FICO score, making it the second most influential aspect of your credit scores. Your credit utilization ratio is the percentage of your revolving credit limit used compared to the total limit.
Lenders use the ratio to assess how much of your credit limit is used by you at any given time. As a rule of thumb, you want to avoid using more than 30% of your credit limit because it lowers your FICO score. But, that doesn’t mean it’s always the right thing to do. Having an even lower credit utilization ratio can help boost your credit scores.
Length of Credit History
Credit history length is a crucial player influencing your credit scores, and it accounts for 15% of your FICO score. If you don’t know what credit history length is, it’s how long you’ve had a credit account.
The ages of your oldest credit account, the newest account, and the average of all your credit accounts come into play when determining the score. You want to have a more extended credit history for a high credit score because it makes you more creditworthy.
Unlike applying for most checking accounts, factors like late payments, credit utilization ratio, and length of credit history affect your credit score. You’ll also want to watch out for the effects of overdraft protection and overdrawing your checking account on your credit score.