Your credit score is more than just a three-digit number. It’s an important financial tool that lenders use to determine how responsible you are when it comes to managing your money. There are several things that affect your credit score, including your payment history and the amount of debt you have, but your banking habits can also make a difference. While swiping your debit card or writing a check won’t affect your score directly, how you handle your bank account can impact your creditworthiness.
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Overdrafts and Your Credit Score
Overdraft simply means that you’ve spent more money than you had in your account. Typically, the bank covers the difference and charges you a fee for doing so. Overdrafts can occur for a number of reasons. Maybe you wrote a check and forgot about it or a deposit didn’t clear right away. When it only happens once, an overdraft usually isn’t that big of a deal.
If, however, you’ve racked up a significant amount of overdraft and you don’t have enough cash to bring your account out of the red it can mean trouble where your credit’s concerned. Eventually, the bank may decide to close your account and refer the debt to a collection agency. At this point, you’ll likely receive a black mark on your credit that can stay in place for up to seven years.
Virtually all banks now offer some form of overdraft protection, although you may have to specifically request this service. Depending on the bank, you may be charged a separate service fee if you decide to opt-in. Certain banks offer overdraft protection that’s reported as a revolving account or line of credit. Credit reporting bureaus view this the same type of overdraft as being equal to a credit card when calculating your score. If you routinely keep a low balance in your checking account, signing up for overdraft protection may be worth it to keep your credit intact.
It used to be that if you wrote a check, it would take a week or more to clear. Nowadays, checks can clear in a matter of one or two days which makes it vital that you have enough money in your account to cover it. In an effort to cut down on the number of bad checks they receive, many businesses choose to use ChexSystems, which is a check verification and credit reporting agency.
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Banks are responsible for reporting negative information to ChexSystems and it can remain on your credit history for up to five years. Some of the reasons you may be reported include frequent bounced checks, excessive overdraft fees or abandoning an account with a negative balance. If you write a check to a business that uses ChexSystems, the transaction may be denied based on the information in your file.
Opening New Accounts
When opening a new checking or savings account, the bank may decide to do a quick credit check before you’re approved. The bank has the option of doing a hard or soft pull. A soft inquiry generally doesn’t affect your score but a hard inquiry will show up on your credit history.
The number of inquiries you have makes up 10% of your FICO® score and each inquiry can reduce your score by 5 to 10 points. If you’re trying to open multiple credit card, loan or bank accounts over a relatively short period of time it could add up to a significant drop. If you’re planning to open a new account, check with the bank first to see what kind of inquiry is required.
Closing an Account
When it comes to your credit, the age of your accounts is a major factor in determining your score. The longer a credit card or line of credit has been open, the better. Therefore, closing older credit card accounts can actually work against you. When you close a checking account, age isn’t a factor but it’s still possible that it could affect your score.
If you’re closing an account with an outstanding overdraft or the bank closes your account because it suspects fraud or other criminal activity, it could show up on your credit. Whether the information is reported through ChexSystems or the three major credit reporting bureaus is ultimately up to the bank. If, however, you’re closing an account because you’ve found a better deal somewhere else your bank can’t hold this against you.
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What’s in your credit report can have a major impact on your finances in terms of whether or not you’re able to get approved for new credit and the amount of interest you’ll pay. Managing all of your accounts responsibly, including your bank account, is one of the easiest ways to maintain a healthy score.
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