Does opening a bank account affect your credit score? There are many benefits that come with having a checking account, some of which may significantly impact your credit. Keep reading to learn how having a bank account can affect your credit score and overall personal finance situation.
How Does Having a Checking Account or a Savings Account Affect Your Credit?
Having any financial account, including a checking and savings account, can typically affect your credit score. You may find these accounts have a positive or negative impact on your score, depending on how you use them. If you neglect to take advantage of your bank account and accumulate delinquent loans sent to a collections agency, you will undoubtedly see a decline. But, if you utilize your bank account and use your money wisely, there is a good chance you will see an improvement in your credit over time.
A New Checking Account Could Affect Your Length of Credit History
How long an individual has open and active financial accounts is a category the three major credit bureaus look at when determining credit scores. The three credit bureaus typically view individuals who have a longer credit history to be more experienced with handling their finances. Many parents and legal guardians set up bank accounts for their children when they are young, so they can start establishing banking activity as soon as possible. Opening a bank account is a great place to start when you want to establish a credit history.
A Bank Account Could Help Protect Your Credit Score
You may also find checking and saving accounts can come with perks that can help protect your credit score. One of these perks is overdraft protection. Say you accidentally write several checks for more money than you have in your checking account in order to pay bills. If you did not have Overdraft protection, this may cause you to have missed or late payments on your credit report. Unfortunately, having delinquent payments in your credit history can negatively impact your credit score for up to seven years. Furthermore, negative balances on your accounts may also come with other inconveniences like overdraft fees.
But with overdraft protection, instead of having bounced checks or a negative balance on your checking account, money is automatically withdrawn from a savings account if you ever accidentally overspend.
A Bank Account Can Help Your Credit Utilization
Another contributing factor to your credit score is your credit utilization. Your credit utilization refers to how much available funding you have at your disposal compared to how much money you owe in various forms of debt. You typically want to have more money in available credit rather than in total debt for your credit score to benefit the most from your credit utilization. A good rule of thumb would be to try to keep your overall utilization at around 30%.
Automatic Payments May Help Your Payment History
Your bank account can also assist you in maintaining a positive payment history. With features like autopay, you can make sure you never miss a payment on a bill or expense. With automatic payments, money is automatically withdrawn from your bank account on the set due date of a bill. If you did not have a bank account, you would have to worry about remembering to send in money yourself every month to pay your bills.
What Else Affects Your Credit Report?
There are also other facets of the credit scoring model that don’t necessarily involve a bank account. Some of those facets include:
Hard Inquiries
Every time you apply for new credit, lenders and other financial institutions will perform a hard credit inquiry. A hard inquiry, also called a hard pull, is an official request for your credit report. Having too many hard inquiries can cause your credit score to dip since this activity may indicate that you are an unreliable borrower. Try to wait a long period of time (usually six months or more) in between each new credit application.
While a hard credit pull can affect your credit score, a soft inquiry cannot. A soft credit inquiry, also called a soft pull, is an informal look at your credit history. Soft inquiries give you all the same information lenders receive in an official credit check. If you want a better idea of what kind of interest rates, loan amounts, or payback terms you may receive on a loan, do a soft credit check on your own before applying.
Credit Mix
The different types of financial accounts an individual has also contributes to their credit score. Credit reporting agencies like to see how much good debt vs. bad debt a consumer has. Good debts are credit accounts that benefit you in the long run, like student loans or a mortgage. Bad debt are credit accounts that almost never benefit your finances, after you use them, like a pay day loan online.
Do I Need Good Credit To Open a Bank Account?
Looking for information on how to open a bank account with bad credit? Great news, you can easily open a checking account, and savings account with any kind of credit! Most banks usually do not care about your credit score if you are just opening accounts and not borrowing money. However, an instance when a bank may want to inquire about your credit score is if you’re going to set up overdraft protection. Since some overdraft protection programs are a line of credit from the bank, they will want to check on your credit before they approve you for this feature.
How Does Opening a Bank Account Work?
With so many online banking options available, setting up a new account with a bank has never been easier! To set up your credit account, you first want to pick a bank you want to do business with. Some popular banks to consider are:
- Chase Bank.
- Bank of America.
- CitiBank.
- PNC.
- Wells Fargo.
- U.S. Bank.
- Truist Bank.
- TD Bank.
Once you’ve picked a financial institution, go to their website, where you should find the option to open new accounts. From there, you will fill out a brief application that will ask for information like your driver’s license number, social security number, income, place of work, and address. After you are approved, your bank will give you your bank account information. Your bank account information will consist of a routing number and an account number.
Once your account is active, you can do things like:
- Sign up for a direct deposit.
- Set up automatic payments.
- Start accumulating interest on a savings account.
Bank Accounts vs. Credit Cards
Perhaps you are wondering which kind of financial account will benefit you most; a bank account or a credit card. To make this decision, you first want to understand the difference between a credit card and a debit card. A credit card is a revolving line of credit that allows people to make purchases using their available credit limit. Each month cardholders receive a credit card statement that shows them how much money they have spent on credit. Cardholders then pay off that balance all at once or with monthly payments. Credit card balances also accumulate interest. So the longer you wait to pay off your balance, the more money you will accumulate in owed interest.
A debit card is directly connected to the card holder’s bank account. As people make purchases with their debit cards, funds are automatically withdrawn from their bank accounts. One of the perks of making purchases with a debit card instead of a credit card is:
- You will not accumulate interest since you are not buying on credit.
- You will not have to worry about making monthly statement payments.
While some card issuers will require their account holders to have a bank account, many do not. Typically, credit card issuers will just ask for credit score, current employment situation, and general income before they determine credit approval.
Bank vs. Credit Union: What Is the Difference?
Are you thinking about opening an account with a credit union? Before you commit, make sure you know the difference between retail banks and credit unions. Credit unions are a type of nonprofit financial institution owned by account owners. Alternatively, banks are owned by profit-seeking investors who may or may not have an account with the bank. Since credit unions are owned by the people who utilize its services, they are more likely to offer unique perks and benefits designed with account holders in mind.
On the other hand, banks are more likely to offer a wider range of financial services. For example, a credit union may only provide checking accounts and bad credit personal loans. At the same time, a bank may offer checking accounts, savings accounts, CD accounts, auto loans, mortgages, and more.
The Bottom Line: Bank Accounts and Your Credit Score
A bank account and how you use it can have a significant impact on your credit score. If you practice financial responsibility, you won’t have to worry about your banking activity negatively affecting your score. In fact, you can even use your bank account to help boost your credit score!
