Will switching banks hurt my credit score?

Will💡 Definition:A will is a legal document that specifies how your assets should be distributed after your death, ensuring your wishes are honored. Switching Banks Hurt My Credit Score💡 Definition:A three-digit credit score (300-850) calculated by Fair Isaac Corporation, used by lenders to assess creditworthiness.?

Switching banks can feel like a big decision, but if you’re worried about how it might affect your credit score, you can rest easy. While the act of moving your money from one bank to another won't directly impact your credit score, there are a few indirect factors to consider. In this article, we'll explore how bank switching affects your credit and provide practical tips to ensure a smooth transition.

Direct Impact: No Harm to Your Credit Score

When it comes to your credit score, the good news is that switching banks will not directly harm it. Credit scores are determined by your history with credit accounts, such as loans and credit cards, not deposit💡 Definition:The initial cash payment made when purchasing a vehicle, reducing the amount you need to finance. accounts like checking or savings💡 Definition:Frugality is the practice of mindful spending to save money and achieve financial goals.. Closing or opening a bank account is not reported to credit bureaus and therefore has no effect on your credit rating💡 Definition:A credit score predicts your creditworthiness, influencing loan rates and approval chances..

Most banks use ChexSystems to screen your banking history when you open a new account, which is a separate process from a credit check. This means opening a new bank account won’t generate a hard inquiry on your credit report.

Indirect Factors: How the Transition Might Affect Your Credit

While the switch itself is harmless, the process of transitioning can indirectly impact your credit score if not handled carefully. Here are some common pitfalls to avoid:

Missing Automatic Payments

One of the most significant risks during a bank switch is missing automatic payments. Forgetting to update your payment information for bills such as rent, subscriptions, or loan payments can lead to late payments, which can stay on your credit report for up to seven years. To prevent this:

• List all recurring payments: Before closing your old account, make a detailed list of all automatic payments.
• Allow a billing cycle to pass: Ensure payments clear from the new account before shutting down the old one.
• Update payment information promptly: Notify all service providers of your new account details well in advance.

Hard Inquiries from New Credit Products

If you’re tempted to apply for a new credit card or line of credit with your new bank, be aware that this will result in a hard inquiry, which could temporarily lower your credit score by 5–10 points. If you’re planning significant financial moves like applying for a mortgage💡 Definition:A mortgage is a loan to buy property, enabling homeownership with manageable payments over time. or car loan soon, it might be wise to delay these until after you've completed your bank transition.

Overdrafting or Closing Accounts with Balances

Accidentally overdrafting your account or closing an account that still holds an outstanding balance can create financial headaches. Overdraft💡 Definition:Withdrawal exceeding available account balance fees may pile up, and unresolved issues with your bank can indirectly affect your creditworthiness💡 Definition:A credit rating assesses your creditworthiness, impacting loan terms and interest rates.. Always ensure your account is balanced and all dues are cleared before closing it.

Real-World Examples

Consider Sarah, who decided to switch banks to take advantage of better interest rates. She meticulously listed her automated transactions and updated her Netflix, gym membership, and utility payments. She waited a full billing cycle to ensure all payments were processed correctly before closing her old account. By planning carefully, Sarah avoided any negative impact on her credit score.

In contrast, John hastily closed his old account without updating his automatic withdrawals. He missed a student loan payment, which resulted in a late payment mark on his credit report, dropping his score by 30 points. This example illustrates how crucial it is to manage the transition carefully.

Common Mistakes and Considerations

• Rushing the process: Take your time to ensure all transactions are updated and processed.
• Ignoring timing: If you're planning to apply for new credit soon, consider the timing of your bank switch.
• Overlooking small subscriptions: Even minor automatic payments can lead to missed payments if not updated.

Bottom Line

Switching banks is a strategic financial decision that does not directly affect your credit score. However, the transition must be handled with care to prevent indirect impacts. By keeping an organized record of your automatic payments, avoiding new credit applications during the switch, and ensuring no overdrafts or outstanding balances are left in your old account, you can transition smoothly and maintain your financial health.

In summary, switching banks requires some diligence, but with the right approach, it can be a seamless process that leaves your credit score intact.