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, colloquially known as credit bureaus, 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 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.
Checking Accounts and Credit Scores
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 listed on your credit report, such issues do not get reported. However, if you overdraw your account and then fail to replenish it and/or 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 errors that may trigger an overdraft.
Late Payments and Credit Scores
If a credit card account becomes delinquent, most credit card companies charge late fees: generally $25 for occasionally late accounts, up to $35 for habitually late accounts. A plethora of late fees will negatively impact the credit score. After a debtor has failed to pay an account for three to six months in a row, the creditor typically charges off the account. The charge off is noted on the consumer’s credit report, and it will also lower the credit score.
Credit Utilization Ratio
Your credit utilization ratio or credit utilization rate is a representation of the percentage of your current borrowing ability being used; basically how much you are borrowing relative to how much…