Will Starting Investing Affect Your Credit? Here’s what you need to know.
Having a good credit score is not just a matter of pride. The higher your score, the easier it is for you to borrow money when you need it and at an affordable rate.
There are many factors that can work in favor of your credit score or cause it to drop. Paying your bills on time, for example, will help increase your credit score, while being late on loan or credit card payments will lower it. Likewise, carrying a lot of credit card debt can negatively affect your score.
If you are considering opening a brokerage account to start investing, you may be wondering if doing so will affect your credit score in any way. Here’s what you need to know.
Not happened from a credit score point of view
Investing your money is a great way to grow it into a larger amount, and these days, brokerage accounts offer many options for building wealth. Not only can you buy stocks and bonds in a brokerage account, but many accounts allow investors to buy cryptocurrencies.
If you’re interested in what opening a brokerage account will do to your credit score, the answer is, for the most part, nothing. Investing money is not a financially irresponsible move, so opening a brokerage account will not lower your score. It will also not raise your score.
In fact, the amount of money and assets you have will not affect your credit score. It is possible to be a millionaire with poor credit, while a person with $700 in the bank can have great credit. While you might think that owning a pool of stocks might raise your credit score since they have the potential to make you richer, unfortunately, it won’t.
However, investing in a brokerage account may indirectly affect your credit score in certain circumstances. In general, you are supposed to provide a solid emergency fund before investing your money. That way, if you hit unplanned bills or if you lose your job, you’ll have cash reserves to draw on.
Investments should not serve as a source of cash in an emergency because their value can often change. If you have to liquidate investments when the money is needed, and do so when their value goes down, you could end up incurring huge losses.
If you open a brokerage account without a proper financial cushion in the bank, and then encounter an unplanned bill at the very moment your investments lose their value, you may not have a high enough balance in your brokerage account to give you the money you need. In this case, you may have to undo your credit card balance charge which in turn could damage your credit score.
But this is a very extreme situation. For the most part, you don’t have to worry that opening a brokerage account will hurt your credit score — especially if you save for emergencies before putting your money into stocks, bonds, digital currencies, and other assets that could lose their value overnight.
Learn how to calculate your credit score
If your goal is to obtain or maintain a great credit score, it is important that you understand what goes into that number. In addition to your payment history and credit usage (that is, the total amount of the revolving credit limit you use once), there are three other factors that are used:
- The length of your credit history
- Types of credit accounts you have opened (A good credit mix is one that isn’t just about credit card balances, but a mix of credit cards and installment loans)
- Number of new credit accounts opened recently (Having too many new accounts in a short time may raise the risk flag that you are borrowing too much)
Investing your money can be a smart financial move. But overall, it won’t affect your credit score a bit.