Will starting to invest impact your credit? Here is what you need to know.
Having a good credit score isn’t just about pride. The higher your score, the easier it will be for you to borrow money when you need it and at an affordable rate.
There are several factors that can work for or lower your credit score. Paying your bills on time, for example, will help your credit score go up, while being behind on loan or credit card payments will decrease. Likewise, taking on too much credit card debt could negatively impact your score.
If you are considering opening a brokerage account to start investing, you might be wondering if this will affect your credit score. Here is what you need to know.
A credit score non-event
Investing your money is a great way to grow it into a bigger sum, and brokerage accounts these days offer many options for building wealth. Not only can you buy stocks and bonds on a brokerage account, but many accounts even allow investors to buy cryptocurrency.
If you’re curious about what opening a brokerage account will do to your credit score, the answer is, for the most part, nothing. Investing money is not considered a financially irresponsible decision, so opening a brokerage account will not lower your score. It will also not increase 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 good credit. While you might think that owning a bunch of stocks can boost your credit score because they have the potential to make you richer, unfortunately, it doesn’t.
That said, investing in a brokerage account can have an indirect impact on your credit rating in certain circumstances. Generally, you are supposed to save a solid emergency fund before you invest your money. That way, if unforeseen bills hit or you lose your job, you’ll have cash reserves to tap into.
Investments should not be used as a source of emergency cash, as their value can change often. If you are forced to liquidate investments when the need for cash arises, and you do so when their value is falling, you can end up suffering heavy losses.
If you open a brokerage account without having a decent financial cushion in the bank, and then find yourself facing an unexpected bill just as your investments have lost value, you may not have a sufficiently high balance in your brokerage account to give you the money you need. In this case, you might be forced to fall back on billing a credit card balance, which in turn could damage your credit score.
But this is a pretty extreme situation. And for the most part, you shouldn’t worry that opening a brokerage account will hurt your credit score – especially if you’re saving up for emergencies before investing your money in stocks, bonds, digital currencies. and other assets that could lose value overnight. .
Know how your credit score is calculated
If your goal is to build or maintain a great credit score, then it’s important to understand what goes into that number. In addition to your payment history and your credit usage (that is, the amount of your total revolving credit limit that you use at one time), three other factors are used:
- The length of your credit history
- The types of credit accounts you have opened (a good mix of credits is not just credit card balances, but rather a combination of credit cards and monthly installment loans)
- The number of new credit accounts recently opened (too many new accounts in a short period of time could set off an alarm signal that you are borrowing too much)
Investing your money can be a smart financial decision. But generally speaking, it won’t affect your credit score.