How Your Checking Account Activity Affects Your Credit Score
A checking account is designed to help you with everyday transactions. You can access the money in your checking account by using a debit card, check or ATM, or by visiting your financial institution online or in person. With a checking account, you can easily pay your bills, make deposits and transfer money.
Typically, a checking account won’t directly influence your credit score, but how you use it can have an indirect effect. In general, you want to watch out for overdrafts and make sure your checks go out on time. And bear in mind that how you use your checking account today can influence whether you’re able to open new bank accounts later.
Keep reading to find out what goes into a credit score and when your checking account may play a role.
What goes into a credit score?
Your credit score is based on the activity documented on your credit report. This activity has to do with your debts and credit history, or the money you owe or have owed. Everyday use of your checking account, such as transferring money, writing checks and making deposits, does not appear on your credit report. However, there are a few circumstances in which your checking account may affect your credit score.
“Since payment history is one of the single largest factors in determining a FICO Score, late payments can have a negative impact,” said Monica Singhania, founder of Purposeful Financial in Irvine, Calif.
Most of us use our checking accounts to pay our bills. If you are late sending those checks, either because you forgot or there was a snag in the process, the late payment could make its way to your credit report. If your payment is so late (typically 30 to 90 days) that the account gets sent to collections, your credit score could take a major hit. So remember to be careful when sending checks and always make sure you have enough money in your checking account (or enough overdraft protection) to cover them.
An overdraft occurs when you’ve spent more money than you have in your checking account. Overdraft information is not typically reported to the credit bureaus, so it may not directly affect your credit score. However, if the bill you were trying to pay goes to collections, that will negatively affect your credit score.
Almost all banks offer some type of overdraft protection, which guarantees that almost any payment you make will go through, even if it takes your balance into negative territory. While some banks charge service fees for overdraft protection, others offer overdraft protection that is reported as a line of credit. If you choose the kind of overdraft protection that is linked to a line of credit, it may affect your credit score.
Although banks don’t send overdraft information to the credit bureaus, they do send it to the debit bureau — an agency that collects and reports information on bank accounts. “Debit bureau data can be pulled any time you apply for a new checking account, background check or rental application,” said Singhania. “Therefore, it’s a good idea to protect yourself from overdrafts as much as possible.”
ChexSystems, the dominant player among debit bureaus, is a check verification service and specialty consumer reporting agency. It provides risk scores and other specific information about closed checking and saving accounts. Bounced checks and overdraft fees are examples of information that ChexSystems may report and store for a five-year period.
If you are interested in opening a new checking or savings account, your financial institution will likely consider your ChexSystems information. In the event you have a poor report with the organization, you may not be able to open a new account.
UltraFICO is a new credit score that will do more than simply evaluate how much you borrow and how quickly you pay it back. It will also consider your checking account balance, the length of your checking history, transaction frequency and overdraft history. If you opt in and manage your checking account well, UltraFICO might increase your chances of getting approved for credit cards and loans.
Why your credit score is important
Put simply, a good credit score can make your life easier. It can help you secure a lower interest rate and favorable terms on a mortgage, car loan, personal loan, home equity loan or any other type of loan you may need. With a lower interest rate and favorable terms, you may be able to save money in interest over the course of the loan.
A good credit score can also help you qualify for higher loan limits, rent the the apartment of your choice and even land lower insurance rates. A good credit score can help you accomplish your financial goals and live the life you want.
How to check your credit score
Checking your credit score is easy. You can check your credit score by using the LendingTree free credit score tool or asking your bank, credit union, online lender or other financial institution. If you’re also interested in features like identity theft insurance and credit monitoring or would like a complete range of your FICO credit scores, you might consider a paid credit score service that includes those features.
You are entitled to one free credit report from each of the three major credit bureaus every 12 months. Credit reports do not include credit scores, but it’s a good idea to check them regularly for errors. You can access your free credit reports at AnnualCreditReport.com.
The bottom line
Although writing a check or swiping your debit card generally won’t have a direct effect on your credit score, the way you handle your checking account may affect your creditworthiness. By practicing good banking habits and paying your bills on time, you can help keep your credit score in good shape, which can help make your financial future a little brighter.