One common belief is that switching a bank account will negatively affect your credit score. This is both, true and false at the same time. The effect from closing a bank account on your credit score may or may not be negative. It may not affect your credit score because you should understand that it is not a credit card. But on the other hand your credit score could be affected when applying for overdraft. Moreover, when opening a bank account, your new bank could perform a credit check. This credit check could have some negative effect on your credit score (if the bank performs a hard inquiry). For that reason, you should primarily understand what are: soft inquiry and hard inquiry, and how changing banks they can affect your credit score.
In its very basic, a soft inquiry is generated by a credit pull not related to any line of credit. This form of inquiry could be performed by you if you want to check your credit score or when your employer is making a background check on you. In addition, the soft inquiry can also be performed when opening a bank account. You should be aware that soft inquiry can be performed without your permission. Whatever the reason for soft inquiry, you should know that this inquiry does not affect your credit score. Noteworthy mentioning is that fact that although soft inquiry doesn’t have negative effect on your credit score, it does show up on your credit report.
Unlike soft inquiry, the hard inquiry is generated when you want to apply for a loan. This type of inquiry can have negative effect on your credit score. Thus, the hard inquiry could decrease your credit score by up to five points. Although it is not a common practice for banks to perform a hard inquiry, when you open a bank account, you could be a subject to this type of inquiry. Meaning that the bank could perform hard inquiry on your credit report. This hard inquiry will be recorded as credit inquiry on your credit report, even though it is performed when you open an account and not applying for a loan. The good thing with hard inquiries is that you should give a permission. In case a hard inquiry has been performed for you without your consent, you can dispute the report.
When closing an account it will not have any impact on your credit score, because the account is not a line of credit. Keep in mind though that changing banks doesn’t have any significant impact on your credit score, unless you didn’t not fulfilled your part of the account agreement. Any behavior which is not in accordance to the account agreement could be recorded in the consumer report i.e. the ChexSystmes report. Since, this report is taking into consideration only the activity with your accounts, it does not affect your credit score.
Be sure to inform yourself about
Be sure to inform yourself about the type of inquiry your potentially new bank will perform, so you would know whether changing banks will affect your credit score. Make sure that you know whether they will make a soft inquiry or a hard inquiry. This way you will know whether there would be a decrease in your credit score or not. Keep in mind that when opening new account, most probably you will be a subject to a soft inquiry. Thus, you have nothing to worry about, because this form of inquiry does not affect your credit score. On the other hand, some banks may perform a hard inquiry, for which they need your permission. This form of inquiry has negative effect on your credit score (it can knock down up to 5 points).