A LITTLE-KNOWN bank account change could reduce your credit score.
Credit scores help lenders and other companies understand your ability to pay money back and keep on top of payments.
Ruth Alderson is a money expert at Starling
Your score can be influenced by whether you’ve missed any credit card due dates which can then impact whether you get a mortgage.
The higher your score is to 850, the better it is.
But one little-known money move that’s on the rise is the amount of people switching bank accounts.
It comes as many providers are offering new customers as much as £200 to switch to them and in a cost of living crisis, that amount of free cash is something many of us wouldn’t turn away.
In April this year, 118,755 people switched accounts compared to 64,955 in April 2022, according to pay.uk.
HOAR spoke to Ruth Anderson, director of lending at Starling Bank to find out more and what to do to boost it.
She said switching bank accounts can actually affect our credit score in a negative way, and it’s something hardly anyone knows about.
Ruth said that lenders will want to understand how trustworthy someone is before they lend them money or approve them for a bank account with an overdraft, for example.
But if a customer has moved bank accounts a lot, then a lender won’t have as much information on you compared to someone who has stuck with the same account for 10 years.
She said: “When a lender is looking at your credit score they’re interested in stability, but the chopping and changes of account switches, particularly the closure of an account can have a negative impact.
“This is because you’re not showing financial stability.”
Ruth added that one factor a credit reference agency might consider is how old your oldest bank account is.
If you’ve switched often, or switched from your oldest account, the agency might not have as good of an understanding about you, because there won’t be a lot of history to read.
The biggest risk is your ability to manage credit
While switching banks can impact your score, and it is something that you should be aware of, the biggest factor is your ability to manage credit.
Ruth said: “The credit score is definitely going to be strongly influenced by your usage of credit because they want to see you demonstrating you have had credit in the past and managed it well.”
This can be done by having an overdraft or any debt and paying it off on time without missing deadlines.
But she also said that having no credit history can be just as detrimental as missing a payment.
A lender and credit reference agency needs to be able to trust you, she explained, so having no history will give them no information.
“It’s about the depth of information, all of it showing stability and food financial management over a period of time,” she said.
Of course, it’s worth checking your eligibility before taking out a credit card or overdraft option.
Credit card providers only have to offer their advertised rate to 51% of applicants.
The actual interest-free period you get will depend on your credit rating.
Make sure you’re in the position to repay any payments on time or you’ll end up paying interest.
Consider the product, not the bonus
As we continue to battle through a cost of living crisis, Ruth said she understands that free cash will be welcomed by many of us.
But she said that customers should also consider what they’d actually get with their potential new bank.
She added: “It’s very important to think about the product that you’re using because the purpose of your bank account is to help you manage your money as well as possible.”
She said a bonus might be just a short-term gain but with bank accounts, you’ll also want to consider the long-term possibilities.
These include saving rates, overdraft options or tools via your online account that could help you with tasks like budgeting.
You can use comparison websites like MoneySupermarket.com to find the best bank account for you.
You can filter the tools with things like overdrafts or what the bank’s app might offer in terms of savings challenges.
If you do want to switch bank accounts, it could of course be a good option to get some extra cash.
However, if you’re thinking of moving or about to apply for a mortgage, Ruth recommended to try and hold off.
Your credit score rating could be affected for a few months and it’s best to have been with a new bank for at least six before applying for a loan.
Look across all credit reference agencies
If you’re wanting to keep track of your credit score, Ruth said it’s important to sign up to all credit reference agencies.
The main three are Experian, Equifax and TransUnion.
She said it’s important to understand that all credit reference agencies are different – this means that one might count switching banks as a bigger cut to your score compared to another.
Unfortunately, this also makes it harder to understand how something like switching bank accounts will impact you.
Ruth said: “They all use information in different ways and give them different weight. It’s hard to know how it’ll impact you.”
HOAR asked Experian how it calculates switching bank accounts but there is no set amount on how much it could drop your score by.
No customer is the same so it really depends on circumstances.
But there are three factors that would drop your credit score with Experian.
These are:
- A new application for credit – too many in a short space of time can reduce it
- Opening a new account – this will reduce your score until lenders see at least six months with no repayment or over limit issues
- The age of your account – this will impact your score if you regularly switch banks as lenders like to see older accounts.
John Webb, consumer affairs manager at Experian, said: “Applying for credit, such as bank accounts or mobile phone contracts too frequently, could result in a score drop.
“So you might want to be careful if you’re applying for something important in the next few months, such as a mortgage.
“However, a score drop from a new account is temporary. If you make your payments on time, it can even increase your score after around six months.
“So, a short-term score drop shouldn’t put you off switching accounts, particularly if there’s an incentive like a cash reward.”
But don’t panic if you fall under any of the three factors as they are only temporary and can be fixed by sticking to the same account for a while or making sure you don’t miss payments.
Use your bills to your advantage
If you’re someone who doesn’t have a credit card or don’t want to take one out, then there are other ways to boost your score.
Ruth said you may not realise it, but lenders can look at your ability to pay essential bills and rent on time as a way of determining how financially stable you are.
Your bank may have a tool that can pass on your bill and rent payments to credit reference agencies and lenders.
For example, Starling has a CreditLadder tool which allows customers to use their rent payments to boost their scores.
The tool reports these to Experian which it will then use to determine your score.
It’s worth asking your bank if it has a similar scheme to Starling.
What to do if you’re struggling with debt
If you are looking for general help and advice to help you manage your debt, there are a number of charities and organisations that may be able to help:
You can contact National Debtline on 0808 808 4000.
An adviser will ask you about your income and spending, so try and have as much information to hand as possible when you call.
They will help you work out what you can afford to repay, and help you decide on the best solution for your debt.
Self-employed workers can also get help through Business Debtline.
Step Change can be contacted on 0800 138 1111.
It can talk you through different options such as debt management plans (DMP), individual voluntary arrangements (IVA), bankruptcy, and debt relief orders (DRO) if they are appropriate.
Citizens Advice is also available on 0808 800 9060.
It is a free and impartial service, and it can help you come up with a plan to get on top of your debt, including which payments to prioritise and how to reduce your living costs.
The organisation’s website has a useful page with advice on many aspects of debt, but you can contact it for more personalised help.
Local organisations may also be able to provide support in your area.
National Debtline also recommends contacting organisations such as Mind, Samaritans and Anxiety UK if debt worries are affecting your mental health.
A benefits calculator can help you work if you might be entitled to extra cash.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected]
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