Will starting to invest impact your credit? Here's what you need to know.
Key points
- There are various factors that can raise or lower your credit score.
- Opening a brokerage account generally won't change your credit score, though in some cases, it could indirectly impact that number.
Having a good credit score isn't just a matter of pride. The higher your score, the easier it will be for you to borrow money when you need to and at an affordable rate.
There are several factors that can work to the benefit of your credit score or cause it to drop. Paying your bills on time, for example, will help your credit score increase, while being late with loan or credit card payments will cause a decrease. Similarly, taking on too much credit card debt could negatively impact your score.
If you're thinking of opening a brokerage account to start investing, you may be wondering if doing so will impact your credit score in any way. Here's what you need to know.
A non-event from a credit score standpoint
Investing your money is a great way to grow it into a larger sum, and these days, brokerage accounts offer numerous choices for building wealth. Not only can you buy stocks and bonds in a brokerage account, but many accounts even allow investors to purchase cryptocurrency.
If you're curious what opening a brokerage account will do to your credit score, the answer is, for the most part, nothing. Investing money isn't considered a financially irresponsible move, so opening a brokerage account won't lower your score. It also won't raise your score.
In fact, the amount of money and assets you have won't impact your credit score. It's possible to be a millionaire with poor credit, while someone with $700 in the bank can have great credit. While you might think that owning a bunch of stocks might raise your credit score since they have the potential to make you wealthier, unfortunately, it won't.
That said, investing in a brokerage account might indirectly impact your credit score in certain circ*mstances. Generally, you're supposed to save up a solid emergency fund before investing your money. That way, if unplanned bills strike or if you lose your job, you'll have cash reserves to tap.
Investments shouldn't serve as a source of emergency cash because their value can change often. If you're forced to liquidate investments when a need for money arises, and you do so when their value is down, you can end up taking serious losses.
If you open a brokerage account without having a decent financial cushion in the bank, and you then run into an unplanned bill at the very moment your investments have lost value, you may not have a high enough balance in your brokerage account to give you the money you need. In that case, you may be forced to fall back on charging up a credit card balance which could, in turn, cause damage to your credit score.
But that's 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 save up for emergencies before putting your money into 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 credit utilization (meaning, the amount of your total revolving credit limit you're using at once), there are three other factors that are used:
- The length of your credit history
- The types of credit accounts you have open (a good credit mix is one that isn't 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 short order could raise a red flag that you're borrowing too much)
Investing your money can be a smart financial move. But generally speaking, it won't impact your credit score one bit.
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