Will starting to invest have an impact on your credit? Here’s what you need to know.
- Various factors can raise or lower your credit score.
- Opening a brokerage account will generally not change your credit score, although in some cases it may have an indirect impact on this number.
Having a good credit rating is not just a matter of pride. The higher your score, the easier it will be to borrow money when you need it and at an affordable rate.
Several factors can work in favor of your credit rating or cause it to drop. Paying your bills on time, for example, will help your credit score go up, while being late with loan or credit card payments will cause it to go down. Likewise, taking on too much credit card debt could negatively impact your score.
If you’re considering opening a brokerage account to start investing, you may be wondering if it will impact your credit score. Here’s what you need to know.
A non-event from a credit rating perspective
Investing your money is a great way to turn it into more money, and brokerage accounts these days offer many choices for building wealth. Not only can you buy stocks and bonds in a brokerage account, 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’s possible to be a millionaire with bad credit, while someone with $700 in the bank can have great credit. While you may think that owning a bunch of stocks can boost your credit score because they have the potential to make you richer, unfortunately, that won’t be the case.
That said, investing in a brokerage account can have an indirect impact on your credit score under certain circumstances. Generally, you are supposed to save a solid emergency fund before investing your money. That way, if unexpected bills arise 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 may change often. If you are forced to liquidate investments when you need money, and you do so when their value is falling, you can end up suffering serious losses.
If you open a brokerage account without having a decent financial cushion in the bank, and then encounter an unexpected bill just as your investments have lost value, you may not have a balance. high enough in your brokerage account to give you the cash you need. In this case, you may be forced to fall back on debiting a credit card balance, which could, in turn, hurt your credit score.
But that’s a pretty extreme situation. And for the most part, you shouldn’t worry about opening a brokerage account hurting your credit score — especially if you’re saving up for emergencies before putting your money into stocks, bonds, digital currencies, and more. other assets that could lose value overnight. .
Know how your credit score is calculated
If your goal is to establish or maintain excellent credit, it’s important to understand what goes into that number. In addition to your payment history and credit usage (i.e. the total amount of your revolving credit limit you are using at one time), three other factors are used:
- The length of your credit history
- The types of credit accounts you have opened (a good credit mix is not just credit card balances, but rather a mix of credit cards and monthly installment loans)
- The number of new credit accounts recently opened (too many new accounts in a short time could 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.
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