We make financial decisions every day, whether we’re in the checkout line at a grocery store or signing a mortgage. Among these financial activities, opening a checking account might seem routine, even mundane.
But does it influence your credit health? The answer might surprise you.
What is a checking account?
In the world of banking and finance, a checking account serves as a home base for everyday transactions. It’s an account where you can deposit funds, which can then be withdrawn for daily expenses like dining out, shopping for groceries, or even making online purchases.
Beyond simplicity and convenience, a checking account offers many benefits. These include:
- Accessibility: One of the key benefits of a checking account is its accessibility. It allows you to deposit and withdraw funds freely, making everyday transactions smooth and unrestricted.
- Convenience: Equipped with a debit card, a checking account allows the luxury of cashless transactions, negating the need to carry physical money.
- Online banking: Almost all checking accounts come with online and mobile banking options. You can effortlessly schedule payments, transfer funds, or check your account balance with just a few taps on your smartphone.
- Security: With money securely stored in a checking account, you're protected from theft or loss that might arise from carrying cash or storing it unsafely.
- Automatic bill payments: Having a checking account allows you to set up automatic payments for recurring bills, ensuring timely payments and avoiding late fees.
- Direct deposits: Employers can directly deposit paychecks into your checking account, speeding up the payment process and providing quicker access to your money.
What are credit scores, and how are they calculated?
Your credit score serves as your financial fingerprint, a statistical measure that lenders, landlords, and sometimes even employers use to gauge your creditworthiness. Running on a numerical scale, credit scores can generally range from 300 (poor) to 850 (excellent).
But how exactly is this number calculated? Credit scores result from intricate algorithms that process data from your credit report.
Here’s what goes into your credit score:
- Payment history: This is a record of your payments, including any late payments or defaults. Maintaining a clean payment history indicates reliability and punctuality to lenders.
- Amounts owed: This simply refers to the total amount of debt in your name owed to lending institutions. Balancing your borrowing and preventing excessive debt can work in your favor.
- Length of credit history: This involves the average age of all your accounts, as well as the age of your oldest credit account. A longer credit history gives lenders more data to assess your repayment habits.
- New credit: This is the number of recent credit applications or inquiries you've made. Frequent new credit applications could indicate financial distress.
- Credit mix: The types of credit you have can span from credit cards to installment loans. A diverse credit mix suggests you can manage different types of credit responsibly.
Does opening a checking account impact your credit score?
The short answer is no. When you apply for a checking account, many banks pull your credit report through a process called credit inquiry. The difference between opening a checking account and opening a credit account lies in whether or not they will perform a soft inquiry or a hard inquiry.
A hard inquiry is a credit check that you authorize during a credit application process, which can knock a few points off your credit score. On the other hand, a soft inquiry occurs when institutions check your credit report for a background check, like when you're renting an apartment.
Soft inquiries do not affect your credit score. Banks may check your credit score, but if they do, they typically use soft inquiries that won’t affect your credit score.
What can you do to improve your credit score?
Now that you understand what goes into a credit score, here are a few tips that can help you maintain and improve it:
- Always make payments on time: Both lenders and credit scoring models appreciate and highly value responsible financial behavior, which you can demonstrate through regular and timely payments.
- Keep balances low: Low balances on your loans and credit cards mean you have a lower credit utilization rate, which could lift your score.
- Keep unused credit cards open: While it sounds counterintuitive, closing old, unused accounts can shorten your credit history and increase your credit utilization rate, which potentially negatively impacts your score. However, keep in mind that many credit cards have annual fees, so it’s important to consider these factors before deciding to keep your account open.
- Be mindful of new credit: Opening various new accounts can leave the impression that you may be a credit risk, especially if the requests cluster within a short time. Too many hard inquiries can dent your score.
How can Vital Card support your financial health?
Vital Card is more than just a credit card — it can be an engine for financial growth. We are champions of responsible spending and sharing, educating users about their credit scores while rewarding them.
By using Vital Card, you can cultivate healthy financial habits and improve your credit health by making responsible decisions. We also have credit education resources to help you learn how to increase your credit score and manage your finances.
The bottom line
Handling your finances, particularly your credit, can sometimes feel like a juggling act. However, it does not have to be. With a good understanding of the financial tools at your disposal and how they affect your credit, you can maintain and even improve your financial health.
If you are considering opening a checking account, rest assured that it likely won’t impact your credit. However, your spending habits do have the potential to influence your credit score, whether for better or for worse.
To get rewards for responsible sharing and spending, consider joining the Vital Card waitlist today.
Sources
What Is a Checking Account? | Experian
What are the Different Ranges of Credit Scores? | Equifax
How Is Your Credit Score Determined? | Experian
Is it Better to Cancel Unused Credit Cards or Keep Them? | Experian
Can Opening a New Account Hurt My Credit Score? | Experian
How Many Points Does an Inquiry Drop Your Credit Score? | Experian
Do You Need a Credit Score to Open a Bank Account? | Experian
Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.