A hard credit check is required when you apply for credit or certain services, such as a loan, credit card, a mobile phone contract and switching or opening a new current account or where an overdraft facility is involved.
Hard credit checks are a complete search of your credit history and can impact your credit score. On the flip side, a soft credit check is a quick review of your credit report and doesn't impact your credit score - examples include when you are getting an insurance quote or checking eligibility for a credit card. There is more on hard and soft credit checks later in the article.
So to answer the question posed - does switching banks affect credit scores? The short answer is, yes, it can. Opening a new current account might lead to a hard credit check, and poor management of old accounts can also have indirect impacts. This article explains how does switching banks affect credit score and offers tips to minimise any negative impacts.
Key Takeaways
Switching banks can temporarily lower your credit score due to hard credit checks and potential missed payments.
To mitigate credit score impacts, keep old accounts open during a switch and ensure all direct debits are updated.
How Switching Banks Can Impact Your Credit Score
Switching banks can affect your credit score depending on the type of account opened and how you manage your old account. For instance, if you’re opening a new current account, a hard credit check is often performed, which can temporarily lower your credit score. Additionally, the frequency of switching banks influences its impact on your score; frequent switches can lead to a bigger impact. Understanding these impacts is crucial for maintaining a good credit score during financial transitions.
It’s not just the direct impacts that matter; indirect factors play a significant role too. Missed payments or closing an old account with an overdraft can harm your credit history. Managing both new and old bank accounts effectively during the switch is crucial.
Hard Credit Checks and Their Effects
When you open a new current account, most banks conduct a hard credit check to determine your eligibility. This type of credit check reviews your credit score and appears on your credit report, potentially lowering your credit scores temporarily. Multiple hard credit checks in a short period can indicate financial trouble to lenders, affecting your chances of getting better interest rates on loans.
While the impact of a single hard credit check usually diminishes over time, multiple checks can have a more lasting negative impact on your credit score. This could make it harder for you to get approved for new credit accounts and could lead to less favorable terms when you do.
Indirect Impacts of Switching Banks
Beyond hard credit checks, switching banks can have indirect impacts on your credit score. For example, not updating direct debits when you switch banks can lead to missed payments, which negatively affect your credit score. Additionally, closing an old bank account with an overdraft can damage your credit history and lead to collections, which is another red flag for lenders.
Maintaining an arranged overdraft and ensuring that your old account is in good standing before closing it can help mitigate these risks. Carefully managing your bank accounts during the transition helps avoid any negative impacts on your credit score. The Current Account Switch Service can help make switching a current account more straightforward - over 10 million current accounts have been switched so far and over 50 banks and building societies are already part of the service.
The Account Switch Service Guarantee means your new bank will switch your payments and transfer your balance, and your old bank will take care of closing your old account. So you don’t need to worry.
Understanding Different Types of Credit Checks
Understanding the different types of credit checks is key to managing your credit score effectively. Credit checks primarily fall into two categories. These are soft checks and hard checks. Each type has different implications for your credit report and credit score.
Soft credit checks do not affect your credit score and are often used by companies to assess eligibility without impacting your credit history. On the other hand, hard credit checks can lower your credit score and appear on your credit report for up to a year.
Soft Credit Check
A soft credit check is a type of credit inquiry that does not show up on your credit report. These checks are typically used by companies to assess your eligibility for certain services or products without impacting your credit score. For example, some banks might perform a soft credit check when you apply for a new account to provide you with an initial assessment.
Since soft credit checks do not affect your credit score, they are a useful tool for individuals who want to explore their options without risking a drop in their credit rating. This makes them ideal for preliminary assessments and pre-approvals.
Hard Credit Check
Unlike soft checks, a hard credit check reviews your credit score and appears on your credit report. Most banks perform a hard credit check when you open a new account, apply for an overdraft, or seek to borrow money. This type of check can temporarily lower your credit score and may affect your ability to secure loans or credit in the short term.
A hard credit check can affect your credit score for up to a year, making it important to manage the timing of such checks carefully. If you’re planning to apply for major credit, such as a mortgage, it’s advisable to avoid multiple hard credit checks within a short period.
When to Avoid Switching Bank Accounts
Switching bank accounts can negatively affect your credit score, particularly if you plan to apply for a loan or mortgage in the near future. Lenders may view recent account switches as a sign of financial instability, which could impact their decision. Therefore, if you have plans to take out significant credit in the next six months, it’s best to avoid switching bank accounts affect.
Additionally, not updating direct debits can lead to missed payments, further harming your credit score. To avoid such issues, ensure that all recurring payments are successfully transferred to your new bank account before closing the old one.
Managing Multiple Bank Accounts
Managing multiple bank accounts can be a strategic way to enhance your financial flexibility. Whether you’re switching banks for better rates or opening additional accounts for specific purposes, it’s important to manage these accounts effectively. The process of moving your account typically takes around seven working days, allowing for a smooth transition.
Switching banks can be influenced by factors such as the end of benefits from the current account or the opportunity for better rates. Understanding and managing these factors allows you to make informed decisions that bank switching affect your overall financial health.
Maintaining Account Longevity
One important aspect of managing multiple bank accounts is maintaining account longevity. The loss of account longevity and history when switching from an older bank account can negatively affect your credit score. One way to mitigate this impact is to keep the old account open while running a partial switch to move direct debits and balance.
Keeping older accounts open preserves your credit history, which lenders view favorably. This strategy helps maintain a good credit score and can enhance your creditworthiness over time.
Overdrafts and Credit Utilisation
Overdrafts are considered a form of credit and can influence your credit utilisation ratio if not managed properly. Minimising overdraft use helps maintain a healthy credit utilisation ratio, which is crucial for a good credit score.
Closing an account with an overdraft can negatively impact both your credit score and history. Therefore, it is essential to manage your overdrafts carefully and ensure that your accounts are in good standing before making any changes.
Neobanks
"Neobanks" offer a modern alternative to traditional banks, utilising technology to provide streamlined financial services. Some like Starling Bank and Monzo Bank, allow account opening with only a soft credit check, avoiding the negative impacts on your credit score. However, be aware that any request for an overdraft facility will involve a hard check.
Prepaid Accounts
Prepaid accounts offer a viable alternative to traditional bank accounts, allowing users to manage their funds without affecting their credit score. These accounts do not require credit checks, making them accessible to a wider audience.
Using prepaid accounts can help individuals control spending and avoid debt, as they can only spend the amount loaded onto the card. This makes them an excellent option for those looking to manage their finances without the risks associated with traditional credit accounts.
How to Minimise Credit Score Impact When Switching Banks
Minimise the impact of switching banks on your credit score by keeping older accounts open to preserve your credit history. Lenders view longer credit histories favorably, enhancing your creditworthiness.
Maintaining timely payments on bank fees and using overdraft protection can also help sustain a positive financial record during bank transitions.
Summary
Switching banks can have both direct and indirect impacts on your credit score. Understanding the difference between soft and hard credit checks, managing multiple accounts effectively, and exploring alternatives like neobanks and prepaid accounts can help you navigate this process smoothly.
By following the strategies outlined in this blog post, you can switch banks without jeopardising your financial standing. Remember, maintaining a good credit score is about making informed decisions and managing your finances carefully.
Frequently Asked Questions
How does switching banks affect my credit score?
Switching banks can potentially lower your credit score due to hard credit inquiries and the risk of missed payments on linked accounts. It's essential to manage the transition carefully to mitigate any negative impacts.
What is a hard credit check?
A hard credit check evaluates your credit score and is recorded on your credit report, which can lead to a temporary decrease in your score. It's important to be mindful of this impact when applying for credit.
When should I avoid switching bank accounts?
You should avoid switching bank accounts if you plan to apply for major credit, such as a loan or mortgage, soon. Doing so may impact your credit score or complicate the application process.
How can I minimise the impact of switching banks on my credit score?
To minimise the impact of switching banks on your credit score, keep your older accounts open to preserve your credit history and ensure you maintain timely payments.
What are neobanks, and how do they differ from traditional banks?
Neobanks are online-only financial institutions that provide lower fees and higher interest rates compared to traditional banks - examples include Starling and Monzo. Unlike their conventional counterparts, they rely on technology and do not have physical branches, making banking more accessible and user-friendly.
CreditLadder can help you improve your credit score
If you want to improve your credit position by reporting your rent payments, CreditLadder is the only way to improve your credit score and position across all four of the main Credit Reference Agencies in the UK, namely Experian, Equifax, TransUnion and Crediva. Building up a high credit score has a lot of benefits, including helping you access finance at better rates - this can also help save you money.
CreditLadder also runs a free mortgage application service in partnership with Tembo which will tell you how much you could borrow.
Remember the information provided in this article is for information purposes only and should not be considered as advice.
