Your credit score can be influenced by many factors. The number—which acts as a guide for lenders as to how worthy you are of getting credit—can go up and down depending on how many credit cards you have, what your debt load is, and plenty more. Your score can go down, and make lenders perceive you as a higher risk client, if you owe a lot on your credit cards or if you’ve failed to pay back previous loans. It can be a bit intimidating and make you feel as if your entire financial existence is laid bare for the world to see. The good news is that it’s not entirely true.
While lenders can be very particular and thorough when it comes to the credit history of their potential clients, here are two things that won’t affect it:
- Overdrafts will not affect your score
Overdraft protection, a service provided by banks to reliable customers, allows you to spend more than what is in your account to help prevent your debit card being declined at the store, or cheques from bouncing at inconvenient moments. The bank approves a certain amount of overdraft, and then expects you to pay it back later. These overdrafts are not reported to credit bureaus.
That’s the good news! But the overdraft still needs to be paid. If you don’t pay back in time the amount that’s overdrawn, the overdraft is then treated as an unpaid loan, and the bank is entitled to report it to a collection agency. This can negatively affect your score. Consider whether the fees that come with having overdraft protection and the risk of not being able to pay them back on time are worth it.
- Closing bank accounts will not affect your score
Many people may think that the number of bank accounts you have, like credit cards, can have an effect on your credit score. But because bank accounts are not loans, they don’t factor in at all. Your credit file only includes loans, credit cards, and records that involve debt, such as bankruptcies.
If you want to change banks for whatever reason, as long as you’ve paid off any fees and overdrafts, you can go right ahead and close those unwanted accounts without worrying about your credit score.
But just because your credit score is not affected by opening and closing bank accounts or going into overdraft on existing ones, it doesn’t mean your credit history won’t be checked. Banks may still do a credit check to determine what limits—if any—they should place on you, such as withdrawal limits at bank machines.
“Some banks may put restrictions on you if you’ve had issues with them in the past,” cautions Elena Jara, Director of Education at Credit Canada Debt Solutions. “They may hold cheques longer than normal.”
The moral, though, is that a credit score is representative of only a fraction of your financial status and closing bank accounts and overdrafts won’t affect it.