With millions of consumers switching banks in fourth quarter 2011 (26 percent because of high fees), you may be concerned what impact moving banks may have on your credit score. It all depends upon the financial institution’s policy. Most banks review your credit report and get a credit score to open any bank account. An inquiry for credit is usually posted on your credit report as a “hard inquiry”, which can have a negative impact on your score. If the institution posts it as a “soft inquiry”, there is no impact on your score.
There are two types of inquiries – hard and soft. A hard inquiry is usually applied when a consumer is seeking credit, such as credit card or loan. Hard inquiries from the past 12 months are included in the credit score and have a negative impact. The degree of impact depends upon whether you have good or bad credit; but the impact is for a short time.
A soft inquiry is when your or a company is monitoring your credit. It is not involved in you actively seeking credit. A soft inquiry is not included in the credit score, so it doesn’t hurt your score.
Your credit report will definitely be pulled if you are opening a credit card or sign up for overdraft protection on your checking account. As a result, a hard inquiry is placed on your credit report. Many banks are set up to request both your credit report and credit score when you open up any account, so they can pre-qualify you for many of the other products and services offered. Often this is reported as a “soft inquiry” since they are evaluating a new customer. It is best to ask the bank how this is being reported.
Bank accounts aren’t reported
Your bank account is not reported to the credit reporting agencies. The exception is an unpaid bounced check that was turned over to a collection agency. It is reported as a collection item, which has a major impact on your credit score and remains on your credit report for seven years.
Bad Check databases
There are bad check databases compiled by ChexSystems and Telecheck. Most financial institutions contact either of these companies prior to opening a checking account. These companies don’t report to the credit bureaus. Bad checks stay in these databases for years. If you habitually write checks that bounce, you may not able to get another checking account. And frankly, you don’t deserve one.
Changing financial institutions could have an impact on your credit score, but it will be minimal and for a short time. You shouldn’t be concerned about this if you are switching accounts that will save you money. If you plan to buy a home or car in the near future, it may be best to hold off switching accounts until you make your purchase.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.