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How does your checking account affect your credit score?

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Your credit report provides a snapshot for prospective lenders, landlords and employers of how you handle credit. For any mortgage, car loan, personal loan or credit card you have had, your credit report lists such details as the creditor's name, your payment history, account balance and, in the case of credit cards and other revolving debt, what percentage of your available credit you have used. Credit reporting agencies also take this information and plug it into proprietary algorithms that assign you a numerical score, known as your credit score. If you do not pay your creditors, pay them late or you have a tendency to max out your credit cards, that kind of derogatory information is visible on your credit report. It can lower your credit score and may prevent you from receiving additional credit, an apartment or even a job. While your checking account is an important part of your financial life, it has little affect on your credit score, and only in certain situations.

Normal day-to-day use of your checking account, such as making deposits, writing checks, withdrawing funds or transferring money to other accounts, does not appear on your credit report. Your credit report only deals with money you owe or have owed. However, a few isolated circumstances exist where your checking account can affect your credit score. When you apply for a checking account, the bank might look at your credit report. Typically, it only does a soft inquiry,

which has no effect on your credit score. On occasion, however, a hard inquiry is used; while this can negatively affect your score, it is usually by no more than five points.

Your credit report might be triggered if you sign up for overdraft protection on your checking account. While banks frequently advertise this service as a perk or a favor to its customers, overdraft protection is actually a line of credit. As such, it can trigger a hard inquiry and also ends up listed on your credit report as a revolving account. Every bank is different in this regard, so before signing up for overdraft protection, make sure you understand if and how your bank reports it to the credit bureaus.

Overdrawing your checking account without overdraft protection or writing a bad check can end up on your credit report, but not right away. Because your checking account itself is not an account listed on your credit report, issues relating to that account, such as overdrafts or bad checks, do not get reported. However, if you overdraw your account and then fail to replenish it and pay the overdraft fees, your bank may turn the money you owe over to a collection agency, most of which do report to the credit bureaus. Keeping close tabs on your account at all times ensures that you always know your balance and can quickly identify any checking account errors that may trigger an overdraft.

Category: Bank

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