Can your checking account affect your credit score? It's possible, but only in certain circumstances that you should avoid.
Your credit score is calculated using information from your credit report, which is a history of all of your credit-based transactions. Checking accounts are funded by your deposits – there's no borrowing of money involved. Normal daily activities like writing checks and transferring funds aren't reported to credit reporting agencies and don't show up on your credit report.
When you open a new checking account, banks can ask for a hard credit pull as part of your evaluation. Hard credit pulls will cause a small temporary drop in your credit score. However, most banks use soft credit pulls that do not affect your credit score at all.
So how can checking account activity affect your credit score? Generally, there's only one way to damage your credit report with a checking account. You have to allow your checking account to be used for borrowing, and you have to abuse that privilege.
If you write a check for more than you have in your account, the check will bounce for insufficient funds. Some banks offer overdraft protection, an effective line of credit that temporarily covers the difference and allows the check to clear. If you sign up for overdraft protection, your bank may report this action to the credit reporting agencies and your activity will become a part of your credit report.
Not all banks choose to report overdraft activity to the credit reporting agencies. If you have overdraft protection, check your bank's policy on reporting and check your credit report to verify their claim.
An overdraft won't harm your credit score, but failure to address your overdraft will. If you wait too long to deposit the funds to cover the overdraft or fail to pay any overdraft fees, your bank could decide to turn your debt over to a collection agency. Collection agencies generally report to the credit reporting agencies, and your account activity will show up as an "adverse event" that lowers your score.
When a bank closes your account for activities like repeated overdrafts or bounced checks (involuntary or "for cause" closings), the bank will also report the information to ChexSystems – an information clearinghouse for banking activity that's similar to the credit reporting agencies. However, ChexSystems only contains negative information.
Most banks refer to ChexSystems when evaluating your request for a new account. If you're on ChexSystems, you may have a difficult time opening a new account or may have to accept limitations on the account regardless of your credit score.
ChexSystems is a completely separate system from the credit reporting agencies. Banks report certain account closings to ChexSystems, and ChexSystems does not report to the agencies. However, the same information that lands you on ChexSystems can end up on your credit report through different routes (such as closed accounts in collections).
You can keep your checking account activity from damaging your credit report simply by using your account responsibly. Consider not using overdraft protection at all and keeping close tabs on your balance and bill payments. Be sure to monitor the timing of automatic deposits and bill payments so an autopayment is not rejected because a direct deposit hasn't registered yet.
If you do choose overdraft protection, understand your bank's terms – whether the activity is reported to the credit reporting agencies, what fees are charged, and how long you have to replenish the overdraft funds. Make good on all overdraft obligations, keep overdrafts to a minimum, and avoid any activities that will put you on ChexSystems in a negative light.
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