Moving bank can bring you savings and make it easier to manage your money. But what’s does it do to your credit report?
I’ve had a few readers ask me recently about the impact of switching bank or opening up new accounts on their credit score.
Well, it’s not a clear-cut case of yes or no. But hopefully this article will help.
Rather watch than read? Check out this video from October 2020 about this topic.
Bank accounts and credit checks
Whether you’re switching to a new current account or just opening an additional one, the new bank will want to check your credit file as part of its decision-making process.
There are two ways a bank can look at your credit file. One is known as a ‘soft check’.
For a current account, this is essentially just to verify you are who you say you are, though it could potentially be used to let you know the chances of you getting an overdraft – perhaps even a pre-approved one.
Just performing a soft check won’t appear on your file. This is also what happens when you get comparison sites to provide a loads of quotes or when you check your own file.
However, sometimes banks and lenders will instead conduct a ‘hard check’. This is where the result of the application – good or bad – will appear on your report, usually for a year. With most bank account applications it will be one of these hard checks.
Your score and credit checks
Before we go any further, it’s important to clarify a few things about credit scores. First up, there are three different scores from three different credit reference agencies. They all assess your credit report differently, so each contributing factor might have a different impact on each score.
Second, though scores can give you an idea of how healthy your credit report is, it’s the credit file itself which banks and lenders look at – not the score.
The way they will interpret the data on the report will change from institution to institution, so they might not agree with the scoring set by the credit reference agency.
And the credit report isn’t even the only thing banks will look at. For example, they might have their own data on you if you’re an existing or past customer, and you’ll provide some additional information when you apply.
That means even with a great score you could get turned down for certain applications, or even if you’re rejected for one product, another might accept you.
So the point is, though credit scores are useful for us as punters, it’s what appears in the file that matters to those doing the checks.
When opening a bank account can hurt your credit score
Multiple hard checks on your report
If the bank is running a hard check when you apply for an account, this mark will appear on your report. Now, if you’re just opening a new bank account that’s not really going to be much of an issue.
But if you are opening more than one current account in a short space of time, or also opening a credit card, switching your energy, applying for a loan and so on, they’ll see multiple searches.
This could indicate to a lender that you’re desperate for credit, and therefore not a good person to accept.
That doesn’t mean you can’t do it. If you have a healthy credit report and don’t have any essential applications for credit coming up you can probably get away with three or four in the same number of months. Though your score will dip, it will recover.
But if you are going for a necessary loan or balance transfer credit card you should try to space them out. Experian’s website recommends no more than one application every three months. For a mortgage it could be worth holding back any new applications for six months to a year.
Applying for an overdraft
Though most people don’t realise it, an overdraft is essentially a pre-approved loan (at a staggering rate, close to 40%).
Just by applying for one as part of your application can have a negative impact on your credit score – even if you don’t use it.
It’s not just that if you do this the bank will conduct one of those hard searches on your report. The overdraft itself will also show to future lenders that you already have access to credit and they might not want to lend you more.
There’s a chance an unused overdraft could help your credit report in the longer term if it helps you keep your credit utilisation (i.e. the percent of borrowing you are actually using) at under 25%.
So if you don’t need an overdraft with your new account then don’t apply for it. And I’d suggest you look elsewhere for cheaper lending IF you eventually need it.
This is one to consider if you’re switching banks. A good signal for your credit score is a long relationship with a financial provider.
Often the longest one we have is with our bank, so switching away replaces years and years of this for an account with no history.
So even if it’s just a soft search on your credit report, you could still see a knock-on effect.
There are a few ways around this. First, it’s all your credit accounts, including credit cards, which are looked at, and it’s often the average age. So if you have an older credit card that mitigates moving away from a long-term bank.
Or you avoid closing the old account completely. If you open a new account and can run a partial switch rather than a full switch. This will help you move all your direct debits, standing orders and balance without you having to close the old account.
However, you won’t be able to claim any of the free cash bonuses or get the benefits of the seven-day Current Account Switching Guarantee.
Alternatively, you can open a new account designed just for switching. You might have to set up a couple of direct debits or make a minimum deposit each month, but you can use this to switch for bonuses.
Your bank doesn’t report to a credit agency
You might find when you check your three different credit reports that not every bank account, credit card and so on appears on each one. That’s because they don’t have to share their information with all three, and can just tell one or two.
With most banks this isn’t a problem. But if you have just one bank account and it doesn’t show on one report that will damage your score. And if a future application for something checks a report without that account it could make it harder to get accepted.
Looking at my reports, Monzo doesn’t appear on Equifax reports, and Starling isn’t on Experian. But if these are extra accounts and you still have a high street account as well (as I recommend) it shouldn’t be an issue.
Opening a joint account
When you open any financial product with another person your credit files become linked. So if the person you run the account with has a bad credit score then it could bring your rating down too. And it goes both ways, so you could hurt someone else’s ability to get credit.
When to avoid opening a new bank account
If you are planning to apply for anything major in the next six months, such as a credit card or loan, and especially a mortgage, then it makes sense to avoid opening a new account for six months to a year.
Bank accounts that won’t credit check you
No credit check bank accounts are obviously appealing to anyone with a poor credit score, a history of things like bankruptcy or if you have a big credit application on the cards.
You might be able to get a standard current account with no overdraft, or you can apply for something known as a basic bank account.
Full current accounts
As mentioned above, these banks each report to two of the three credit reference agencies, and switching from a long held account will have an impact too.
This digital bank will only do a soft check when you apply. They’ll use that to verify who you are and check what overdraft they could offer you, but they won’t do the full hard search unless you say you’d like the overdraft. Here’s my full Starling Bank review.
There’s also no hard check for Monzo, another digital bank. Here’s my full Monzo Bank review.
Basic bank accounts
Most major banks will offer these free accounts. They won’t be subject to a credit check and you can open one with just one form of ID. You can do everything with one that you can with a standard account. However you won’t be able to get an overdraft.
Which? recommends Nationwide, Metro and Co-op, while MSE suggests VIrgin Money, Barclays and also Co-op.