When Closing A Bank Account Can Hurt Your Credit
There is a situation where closing a bank account could affect your credit score, in a bad way. If your account is overdrafted and has a negative balance when you close it , the negative balance may be sent to a collection agency for further action. Third-party collection agencies collect debts on behalf of other businesses.
Once a collection agency takes over your account, they will likely report the account to the credit bureaus. At that point, it will go on your credit report and be factored into your credit score. Unfortunately, collections remain on your credit report for seven years from the first date of negative activity, even after payment is made.
Mishandling your checking account can also land you in ChexSystems, which is a consumer reporting agency for financial institutions. Banks often use ChexSystems to determine whether to allow you to open a checking account. Any negative reports made to ChexSystems, including overdrafts you never cleared up, will remain in the system for up to five years. You may have a hard time opening a checking or savings account if you have a negative record with ChexSystems, but these records aren’t included in your consumer credit score.
Help I Went On An Application Spree
Earlier in this article, we mentioned an application spree. This is where an consumer applies for SEVERAL lines of credit over the course of a month or so.
The result? An AWFUL surprise next time they see their credit report.
Dont panic theres hope. If youre experiencing the consequences of too many hard inquiries, were here to help. Contact us today so we can dive into your specific situation and begin planning a way to help you escape this frustration.
Why Did My Credit Score Go Down After Opening Up A Credit Card
A lot of people are disappointed to find out that their credit score has gone down after opening up a new credit card. In some cases the credit score goes down twice, once directly after an application and then again sometime around a month or two later. This causes a lot of worry but its completely normal when this happens and its only temporary. Heres whats likely going on when this happens.
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Inquiries Shared With Others
- If its a hard inquiry other creditors will be able to see it
- Because it matters to them what youve been up to lately
- If I were lending money to someone Id want to know if they tried getting money from others recently
- Some common examples of hard inquiries include credit card and mortgage applications
These inquiries are the ones that you initiated, typically in order to get some kind of new credit, such as a credit card, auto loan/lease, mortgage, cell phone, etc.
They appear on your credit report and are visible to other prospective creditors and employers if and when they pull your credit report.
Simply put, theyre visible because they affect your credit in one way or another. And creditors need to see them to make subsequent lending decisions.
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How Is A Credit Score Calculated
Your credit score is a numerical figure which reflects information about your credit behaviour, repayment capability, defaults, repayment history, etc. In simple words, its a number that displays your credibility to lenders.
Different credit scores have different scoring models and calculation techniques. However, most of them are based on the following key factors:
Payment history: Your repayment history has a significant impact on your credit score. Making timely payments every month is the key to have a stable payment history. If you are unable to make the full payment, ensure to make at least the minimum payment.
: Credit utilisation refers to the proportion of available credit which you end up using every month. For an ideal credit score, you should try to keep your credit utilisation below 30%.
Length of credit history: The length of your credit history also determines your credit score. If you have old credit card accounts, avoid closing these. Lenders can easily check your credit behaviour based on your credit history. If there is no credit history, it may be difficult to source fresh credit.
Types of current credit: Banks and lenders prefer customers who ensure responsible use of different credit types. If you are currently using only credit cards, try adding a loan to the credit portfolio. Always opt for a healthy mix of secured and unsecured loans to have a positive influence on your credit score.
The Bottom Line: Dont Spend Too Much Time Worrying About Inquiries
If youre about to apply for a new loan or important credit account, you may want to do everything you can to increase your credit score. In those situations, minimizing the number of recent hard inquiries on your reports could help you get approved for a good rate and terms.
However, credit inquiries account for a very small portion of your credit score, and they usually wont make or break your overall creditworthiness if you already have a good or excellent credit score.
Its generally much more important to focus on paying your bills on time and only using a small portion of your available credit limits on credit cards and lines of credit. Even if you currently have poor credit, if you focus on these more important credit-scoring factors, you may be able to increase your score to the good to excellent range.
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How To Minimize The Effect Of Hard Credit Inquiries
When youre buying a home or car, dont let a fear of racking up multiple hard inquiries stop you from shopping for the lowest interest rates.
FICO gives you a 30-day grace period before certain loan inquiries, like those for mortgage or auto, are reflected in your FICO® credit scores. And FICO may record multiple inquires for the same type of loans as a single inquiry as long as theyre made within a certain window. This window is typically about 14 days.
While some lenders can rely on scoring models that give you more time to shop without incurring an additional hard inquiry, you may want to stick to 14 days to do your comparison shopping, since you likely wont know which scoring model a lender relies on to generate your score.
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How Is A Credit Score Determined
To understand whats happening, you first need to have a good grasp on how credit scores are determined. There are a number of different types of credit scores but the one most commonly used is the FICO model. Your FICO credit score is determined by the following categories:
In this instance, the biggest factor that will be negatively affected is the new credit category that makes up 10% of your score. New credit looks two major things affected here: recent inquiries and new accounts opened.
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Who Can See And Use Your Credit Report
Those allowed to see your credit report include:
- banks, credit unions and other financial institutions
- offer you a promotion
- offer you a credit increase
A lender or other organization may ask to check your credit or pull your report”. When they do so, they are asking to access your credit report at the credit bureau. This results in an inquiry in your credit report.
Lenders may be concerned if there are too many credit checks, or inquiries in your credit report.
It can seem like you’re:
- urgently seeking credit
- trying to live beyond your means
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What Can Lower Your Credit Score
While checking your own credit score won’t change it, there are plenty of other things that can affect your credit score negatively. Here’s a quick breakdown of each factor that influences your FICO® Score:
Because there are so many variables that go into calculating your credit score, it’s impossible to determine exactly how much damage a negative item may cause to your score. But if you notice your credit score drop and are wondering why, look at these areas to find the likely reason.
Mistake On Your Credit Reports
So far weve assumed that your credit scores dropped because of accurate information on your credit reports. But what if thats not the case?
Lenders can make mistakes too. Thats why its important to check your credit reports to keep an eye out for errors. The CFPB says that credit report inaccuracies are one of the most common issues it deals with each day.
If you find a mistake on your credit reports, you have the right to dispute it with the credit bureaus and with the reporting lender. Companies are required to investigate the dispute free of charge and promptly correct errors that are confirmed.
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Who Creates Your Credit Report And Credit Score
There are two main credit bureaus in Canada:
These are private companies that collect, store and share information about how you use credit.
Equifax and TransUnion only collect information from creditors about your financial experiences in Canada.
Some financial institutions may be willing to recognize a credit history outside Canada if you ask them. This may involve extra steps. For example, you may request a copy of your credit report in the other country and meet with your local branch officer.
Why Should You Check Your Credit Score
Now you know that you can check your credit report and score without damaging the credit youve worked hard to build, but why should you care? Does your credit score really matter as much as some people say it does?
Its easy to believe your credit score is inconsequential, but anyone whos ever purchased a home, borrowed money for a car or applied for a credit card can tell you otherwise. While your past credit behavior isnt the only factor thats considered when you apply for new credit, your credit score alone tells lenders a lot of what they want to know.
If you have a credit score thats considered good meaning a FICO score of 670 or better youre much more likely to be approved for the new credit line you want with fair terms and conditions. But if your credit score is lower than that, you may have to pay more fees and higher interest along the way, or you may not get approved at all.
Interestingly, your credit can even impact your auto insurance rates or your ability to get a job if a potential employer asks to see a modified version of your credit report as a condition of your hire. Good credit can be the key to getting the life you want, but the opposite is also true.
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Not All Credit Inquiries Leave Your Score Untouched
Sienna is a self-proclaimed credit card nerd who has been creating personal finance content for more than seven years. She joined The Balance as a staff writer and is now managing special projects to further engage readers in important topics. Sienna’s work has been cited by major news outlets and government agencies. She holds a journalism degree from the University of Wisconsin Oshkosh.
No, checking your credit score does not lower your score. In fact, its essential to regularly check your score so you can track how different credit activities impact the number.
However, if a lender checks your credit score, that action may temporarily lower your score. Heres why.
How Many Points Will A Hard Inquiry Impact Your Credit Score
A hard credit inquiry could lower your credit score by as much as 10 points, though in many cases the damage probably wont be that significant. As FICO explains: For most people, one additional credit inquiry will take less than five points off their FICO Scores.
FICO also reports that hard credit inquiries can remain on your credit report for up to two yearsbut when FICO calculates your credit score, it only considers credit inquiries made in the past 12 months. This means that if your credit inquiry is over a year old, it will no longer affect your FICO credit score.
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Pay Your Bills On Time
According to Experian, payment history is the most influential factor for both your FICO and VantageScore. From a lenders perspective, an established history of timely payments is a good indicator youll handle future debts responsibly, too.
You want to avoid things like late payments, defaults, repossessions, foreclosures, and third party collections, says John Ulzheimer, credit expert, formerly of FICO and Equifax. And filing bankruptcy is a horrible idea. Anything that would indicate non-performance of a liability is going to harm your credit score.
Whats A Soft Credit Inquiry
According to the Consumer Financial Protection Bureau , a soft checkâalso known as a soft inquiryâis a review of your credit file and existing accounts. Soft inquiries donât impact your credit scores.
Examples of Soft Credit Inquiries
- Viewing your own credit reports and scores.
- Opening a bank account.
- Pre-qualified or pre-approved credit card offers.
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How Often Can I Check My Credit Score
You can check your credit score as often as you want. If you sign up for an account with a free site, youll receive regular score updates via emailsometimes as often as every week.
A basic rule of thumb is to view your credit score at least once every few months, especially if youre in the process of building your credit. A recent study by Consumer Reports found that 34% of users had an error on their credit report. If you can catch a credit mistake early, you may be able to avoid problems like getting denied for a loan or apartment lease.
Review Your Credit Reports
To improve your credit, it helps to know what might be working in your favor . Thats where checking your credit history comes in.
Pull a copy of your from each of the three major national credit bureaus: Equifax, Experian, and TransUnion. You can do that for free once a year through the official AnnualCreditReport.com website. Then, review each report to see whats helping or hurting your score.
Factors that contribute to a higher credit score include a history of on-time payments, low balances on your credit cards, a mix of different credit card and loan accounts, older credit accounts, and minimal inquiries for new credit. Late or missed payments, high credit card balances, collections, and judgments are major credit score detractors.
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One Of Your Credit Limits Is Lowered
On occasion, a creditor may lower your available credit. This happens for various reasons, but when it does occur, your credit utilization ratio can go up very quickly and impact your credit score.
âSolution: Ideally, you should make good financial decisions to prevent a bank from considering you as a bad credit risk and lowering your limit in response. You also want to keep your customer profile data updated, including any pay raises you received. Showing an increase in income may be enough to stop or even reverse a harmful credit limit decision from the lender. In the meantime, keep paying off credit card balances to lower your utilization ratio.
When Should You File A Dispute
There are a few circumstances when you may want to dispute a hard inquiry and have a good chance of getting it removed.
- If the hard inquiry is from over 24 months ago, it may no longer be timely and should possibly be removed from your credit reports.
- If a creditor checked your credit but you never gave it your verbal or written permission to do so, it may have violated the FCRA and the hard inquiry could be removed.
- If someone else applied for credit in your name, you can dispute the fraudulent hard inquiry as you didnt authorize the credit check. Also, look for an associated account, dispute that account and contact the creditor to let it know that youve been the victim of fraud.
You can file a dispute with each of the credit bureaus online, by mail or over the phone. The dispute process with data furnishers can vary depending on the organization.