Historically, building credit with a checking account was practically impossible. But things have recently changed. Some financial institutions are starting to introduce banking products with built-in features designed to help build your credit score. These innovative products aim to make it easier for people to establish and improve their credit scores while conducting their normal banking activities.
As you explore your options for building credit, remember that there are many other strategies available, like getting a secured credit card or using a credit-builder product. With the right approach and financial habits, you can make progress toward improving your credit score, regardless of whether you’re using a checking account to do so.
Understanding the Basics of Credit Scores
A credit score is a three-digit figure that represents your creditworthiness. Simply put, it demonstrates the likelihood of you repaying your debts on time.
It consists of five components:
- Payment history: 35 percent of your credit score
- Amounts owed: 30 percent of your credit score
- Length of credit history: 15 percent of your credit score
- Credit mix: 10 percent of your credit score
- New credit: 10 percent of your credit score
Your credit score impacts your ability to secure loans, credit cards, and employment opportunities in some sectors. Plus, it can determine if you’ll need to pay a deposit on utility accounts.
A higher credit score generally means you are considered a lower risk to lenders, possibly leading to more favorable interest rates and competitive loan terms.
There are several credit scoring models. However, the one used by more than 90 percent of lenders and creditors to make lending decisions is the FICO score. It has a score ranging from 300 to 850, and it is grouped into the following categories:
- 800 to 850: Exceptional FICO Score
- 740 to 799: Very Good FICO Score
- 670 to 739: Good FICO Score
- 580 to 669: Fair FICO Score
- 300 to 579: Poor FICO Score
To maintain a strong credit score, developing responsible financial habits, such as paying your bills on time and keeping your credit utilization rate low, is essential. Regularly monitoring your credit report for inconsistencies or signs of fraud can also help protect your credit score.
Services like Experian IdentityWorks can help you keep an eye on potential identity theft and safeguard your credit.
The Importance of a Healthy Credit Score and Credit Building
A healthy credit score can provide significant savings and benefits that extend beyond easily obtaining loans and credit cards. With good credit, you can access lower interest rates, potentially saving you thousands of dollars in interest over your lifetime. For example, a good credit score can save you thousands of dollars in interest on large credit products, like mortgages and auto loans.
Building credit may seem like a challenging task. Still, it’s essential to start working on it early. One of the most effective ways to build credit is through on-time payments and responsible use of credit cards, as payment history accounts for a significant portion of your credit score. By maintaining a positive payment history, you can prove to lenders that you can manage credit responsibly, which can lead to better borrowing opportunities in the future.
Regarding checking accounts, they don’t directly impact your credit score, as checking account activity is not typically reported to credit bureaus. That said, practicing good financial habits with your checking account can indirectly influence your credit-building journey.
Although not directly tied to your credit score, some financial products can help you build credit with banking features. For instance, Experian CreditMatch™ can help you find loans and credit cards aligned with your credit scores, potentially assisting you in securing credit products that promote healthy credit building.
What is a Checking Account, and How Does It Work?
A checking account is a type of bank account that allows you to effortlessly manage your finances. Offered by various banks, credit unions and financial platforms, these accounts enable you to deposit money, make purchases and pay bills with ease. Unlike savings accounts, checking accounts are designed for frequent transactions, providing quick and convenient access to your funds.
To open a checking account, you can visit a traditional brick-and-mortar bank, an online bank or a credit union. The process usually includes providing your personal information, such as your name, address and social security number. Once your account is set up, you will receive a checkbook and a debit card, which you can use for everyday purchases and to pay bills.
It’s important to note that checking accounts may have fees and limitations, such as monthly maintenance fees or minimum balance requirements. However, many banks offer fee-free options and rewards programs to attract customers and encourage proper financial management. When choosing a checking account, consider your financial needs and preferences to find an account that suits you best.
The Role of Checking Accounts in Building Credit
Direct Impact of Checking Account Actions on Credit Scores
In general, actions related to your checking account, such as deposits and withdrawals, do not have a direct impact on your credit scores. This is because banks usually do not report checking account activity to credit bureaus.
That said, some digital checking accounts offer features that can help you build or improve your credit health without taking on additional debt.
Non-Direct Impact of Checking Account Actions on Credit Scores
While checking account actions may not directly affect your credit scores, they can still play a vital role in your overall credit history. For example, maintaining a healthy balance in your account and avoiding overdrafts can demonstrate your ability to manage finances responsibly.
On the other hand, repeated overdrafts or other negative account activity can send a signal to banks that you might struggle with managing financial responsibilities. If they decide to close the account and send it to a debt collector, the negative balance could be reported to the credit bureaus.
Can You Build Credit with a Checking Account?
As mentioned, building credit with a checking account is now possible. You’ll need to find a financial institution or online platform offering checking accounts with these capabilities.
Common Misconceptions About Checking Accounts and Credit Building
There are a few common misconceptions about checking accounts and their impact on building credit. For starters, many people believe that having a checking account with a bank automatically helps to build credit. In reality, checking and savings account activity is not usually reported to credit bureaus, so they don’t directly affect your credit scores. However, as already mentioned, some financial institutions offer banking products with built-in features that can help build credit. These are not the standard checking accounts you may be familiar with.
Another common misconception is that opening multiple checking accounts will improve your credit health. However, the number of checking accounts you have has no direct impact on your credit score.
Many people also think that closing a checking account will have negative consequences for their credit score. In most cases, closing an account will not hurt your credit score as long as the account is not in the red. If you’re considering closing a checking account, make sure all associated debts are settled to avoid any harm to your credit.
Alternative Ways of Building Credit
If you’d prefer not to build credit with a checking account, there are viable alternatives to consider.
Secured Credit Cards
A secured credit card is a great option for those looking to build their credit history. These cards are backed by a deposit made by the cardholder, which typically serves as the credit limit. Most banks offer secured credit cards, and they report your payment activity to the major credit bureaus, helping you establish a solid credit history over time.
Installment Loans
Installment loans are another option for building your credit. These loans require you to make fixed monthly payments over a set period, and timely payments can establish a positive payment history. Student loans, auto loans and personal loans are common examples of installment loans.
Credit Builder Loans
A credit builder loan is a more specific type of installment loan designed specifically for building credit. These loans are usually offered by credit unions, although some banks are starting to feature them as well. The amount you borrow is held in a secured account, and you make regular monthly payments to the lender while the principal accumulates in the account. Once the loan is repaid, the accumulated principal is released to you, and your timely payments contribute to a positive credit history.
Personal and Home Equity Lines of Credit
Personal and home equity lines of credit are other ways to build credit. A personal line of credit functions like a credit card, enabling you to borrow money up to a certain limit with variable interest rates. On the other hand, a home equity line of credit (HELOC) is a line of credit secured by your property. Both options require you to make monthly payments, and effectively managing them can positively affect your credit history.
Digital Checking Account that Builds Credit
A digital checking account that helps build credit is an innovative approach to credit building. This option allows you to leverage your regular financial activities to contribute to your credit history without the need for traditional credit products.
