Does switching banks affect credit rating?

Does switching banks affect credit rating?

This page was last updated on 1 November 2020

Does switching banks affect credit rating?

This article guides you through everything you need to know about credit ratings and switching banks. 

It gives you advice about how having accounts with different banks can affect your credit score, and answers some of the top questions about the topic.

Topics that you will find covered on this page

You can listen to an audio recording of this page below.

What is a credit rating?

Credit ratings (also called “credit scores”) are a system used to grade how creditworthy an individual or business is. 

An agency gives you the score based on what they know about your financial history. They use this part of your past behaviour to try to predict how likely you are to pay off your debts in the future. 

If you have a good score, they are confident you will pay back your loan on time. A poor score means they have some doubt that you will prioritise meeting your financial obligation to the lender’s institution. Or, they may think that at this point in time you aren’t in a stable enough financial position.

Does switching credit cards affect credit rating?

Maybe. Switching bank account credit cards may negatively affect your credit score in several ways. But, it’s important to note that it may not affect your credit score at all.

This is especially true if you have been using one credit card for a long time. It’s important not to automatically close old credit card accounts.

On average, having a long-running card listed on your credit history can give you points in your favour. 

For example, if you have managed your credit card responsibly for many years and always made payments on time, then this will look great in your credit report. Lenders will see that you can be relied on to meet your financial obligation to them, and so you are more likely to be considered creditworthy.

Another thing to consider is the fact that transferring banks when you have an outstanding overdraft to be paid off can harm your credit score. You should avoid leaving a negative balance behind, or the bank may take action and this will be recorded on your credit report.

This is why it’s worth double checking account overdrafts before switching banks.

Here is a useful video that discusses what impact bank account activity has on your credit rating.

Will switching current accounts affect my credit score?

No. If you make sure that you have paid off your overdraft before switching banks, then a current account switch will not negatively impact your credit score.

You should also be aware that if you encounter any issues with making payments while transferring current accounts, your new bank can have these circumstances noted in your credit report. 

So, a current account switcher should not have a worse credit score so long as they have paid off their outstanding overdrafts to their old bank before making the switch.

switching bank account

How is my credit score affected if I open multiple bank accounts?

Generally speaking, credit scores are not affected by the number of checking accounts that you open in your name.

Having multiple savings accounts can be beneficial to consumers for several reasons. For example, if:

  • You are in a committed relationship and want to open a joint account in addition to your own personal bank account.
  • You want to use different banks and cards to help you organise your finances. By dedicating one account to paying bills and keeping its funds topped up, you can make sure that your payment for bills always goes through on time.
  • You want to use the different interest rates of your savings accounts to make some extra cash.

But there are certain cases where opening multiple accounts can affect your credit score in a negative way. 

The first is if you open several accounts within a short timeframe and each new bank pulls your credit file.

In the short term, this can really harm your credit score. This is because the credit rating agencies might interpret this as a sign of financial instability and a lack of loyalty to one particular bank. 

Each application to a new bank for a credit card will be listed on your credit record for about one year. Trying to space out your applications for credit will help avoid this problem.

The second way that opening accounts with multiple banks, or several accounts with the same bank, can harm your score is if you let your balance fall into the negative. 

When you have several accounts it’s easy to forget about some of them. Then, you may accidentally lose money to monthly maintenance fees or old balances. Even a free savings account may have terms requiring you to pay in a certain amount of money each month in order to avoid a charge. 

Having multiple accounts unfortunately means you have a higher risk of falling victim to fraud, as you may not be paying attention to the money going in and out .

Finally, it’s important to remember that lenders and other credit providers (such as mobile phone companies) are wary of customers with too many bank cards and savings accounts. This is because when you have access to a lot of credit, you can fall into debt quickly if you don’t keep a close eye on your financial situation.

For these reasons, you may want to close old banking accounts that you no longer use.

Does opening and closing bank accounts hurt your credit score?

As explained above, opening and closing accounts can have both a positive and negative effect on your credit score.

Before making any decisions about closing accounts with bank branches, you should think carefully about your options. 

It will help to make an assessment of each account by considering each question below:

  • Does your account have a high credit limit but a low balance? Having an account like this can be great for your credit score as it shows the CRA (and the lender) that you have past experience of managing your money well.
  • How much do you pay in fees for this bank account? If it is costing you a lot of money to keep open, it could be a helpful change to close the account.
  • Does your savings account have a good interest rate? Of course, you may want to keep an account like this open to take advantage of the opportunity to grow your savings over time.
  • How long have you used the service? The majority of the time, an old and well-maintained bank account will look good in a credit check.

Remember that bank institutions won’t just automatically close accounts that haven’t been used for a long time. The proper way to close a bank account that is no longer of use to you, or is causing inconvenience, is to call your banks. 

Try to carry out the process of closing accounts with your banks over a long period of time. Doing this gradually is a way for bank customers to make sure they don’t accidentally harm their credit score.

affect your credit

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