There are several banks and financial institutions in the United States, so there is a huge possibility that you might wake up one day with the intention of changing your bank. People change their banks for several reasons. For some, it could be due to the bad customer service of their bank. For other individuals, it could be because the loan terms of their bank aren’t favorable. Regardless of the reason behind your intention to switch banks, it makes sense to ask some questions. One of them is: will changing banks affect your credit score?
Switching banks shouldn’t affect your credit score provided you don’t apply for a new credit card while opening up new savings or checking account.
Your credit score is very important as it plays a key role in your finances, such as your ability to secure a loan and, sometimes, a job. That said, it makes sense to take note of those things that can plunge your credit score and put measures in place to eradicate them. Is switching banks one of the things you should take note of? If you change your bank, will it be reported to the credit bureau? If these are your concerns, this article is designed to put them to rest.
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Does Changing Bank Affect Credit Score?
Individuals who understand the importance of having a high credit score are often careful, looking out for factors that could drive their score down. If you fall in this category of individuals, you may want to know if switching your bank will affect your credit score.
Of course, sticking with a bank forever isn’t a must. You are allowed to change banks, the same way your bank can end its relationship with you anytime. However, sometimes an innocent action like switching banks can come with terrible consequences. To ensure your credit score stays good, it makes sense to determine if such action is bad for it or not.
What Is a Credit Score?
A credit score is a number between 300-850 that represents your creditworthiness. The higher the score, the better your chances of securing a loan, especially one that comes with favorable terms.
A credit score is based on credit history, the number of open accounts, total debt levels, repayment history, and other factors. Lenders use these scores to determine the probability that an individual will repay loans quickly.
The Fair Isaac Corporation made the credit score model, also regarded as FICO, and it is utilized by financial institutions like banks and credit unions. While other credit scoring systems exist, the FICO score is the most commonly used. There are several ways to enhance your score, including repaying loans and cutting your debt.
Having understood what a credit score is, let’s consider the factors that affect this score.
Factors That Affect Your Credit Score:
- Payment history: Payment history is your track record of paying your credit accounts. It is the most significant ingredient in credit scoring, and even one missed payment can have a huge effect on your score. Lenders want to ensure that you will repay your debt and on time when they are considering you for new credit. Payment history makes up 35% of your FICO score (the credit score adopted by most lenders).
- The amount owed: Your credit usage, especially as depicted by your credit utilization ratio, is the next most significant factor in your credit scores. This ratio is calculated by dividing the total revolving credit you are currently using by the total of your entire revolving credit limits. The ratio evaluates how much of your available credit you are using and summarizes how much you depend on non-cash funds. Using over 30% of your available credit is a turn-off for creditors. Credit utilization makes up 30% of your FICO score.
- Credit history length: How long you have held on to a credit account makes up 15% of your FICO score. This includes the age of your oldest credit account, the age of your most recent credit account, and the average of all your accounts. Generally, the longer your credit history, the higher your credit scores.
- Credit mix: Individuals with high credit scores always carry a diverse portfolio of credit accounts, which might include a car loan, credit card, student loan, mortgage, or other credit elements. Credit scoring models look at the types of accounts, including how many of each you have as a sign of how well you manage a panoply of credit products. Credit mix makes up 10% of your FICO score.
What Doesn’t Affect Your Credit Score:
After understanding the factors that affect your credit score, it is important to understand the factors that don’t.
Here are a few of them:
- Checking your score
- Rent and utility payments
- Income and bank balances
What about switching banks? Does it affect your credit score?
Changing banks wouldn’t affect your credit score, provided you don’t apply for a new credit card when you are opening up new savings or checking account.
According to Equifax, banks don’t report information on checking or savings account as no line of credit is being extended to set up either of them, so changing banks wouldn’t create any new lines on your credit report or discard old ones.
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Is Switching Bank Account a Good Idea?
If you relocated to a new environment and discovered that your existing bank branch is quite far from your home, you can change your bank account. You could also change your bank account if you are dissatisfied with the services rendered by your exiting bank. There are several things that could compel you to change your bank account. However, do you think it is a good idea?
Switching a bank account is a good idea, providing you are doing it for the best reasons. It becomes a terrible idea if you intend to escape debt or other important obligations.
Before switching bank account, ensure you contact a representative of your bank, so you are aware of the processes that are involved.
