If you’re considering switching to a new financial institution, you might wonder how does switching banks or credit unions affect your credit score? The short answer is that most of the time it doesn’t.
However, there are a few mistakes people can make while switching financial institutions that can damage their credit score. Knowing what these mistakes are and how to avoid them is a key part of successfully switching to a new bank or credit union.
Transfer Your Bill Payment Information to Your New Account
The most common way switching to a new financial institution can hurt your credit score is if you forget to switch your online bill payments to your new account.
The best way to avoid this is by keeping good records. Start by making a record of your automatic payments before you switch accounts, including how much you’re paying each month on average and the date each bill’s payment is due.
Once you’ve opened your new account, go through your list of all the companies to whom you make automatic payments and update your bank account information for all of them. If you need to, reschedule your automatic payments to make sure you have enough money in your new account when the bill is due.
Don’t Close Your Oldest Credit Account
One of the factors credit reporting bureaus use to determine your credit score is the length of your credit history. In other words, credit reporting bureaus pay attention to the oldest credit account you have.
While some people's oldest credit account might be a loan or a mortgage, for most people their oldest credit account is one of their credit cards. This is especially true since loans and mortgages eventually fall off credit reports 10 years after they're paid off, while credit card accounts will still affect your credit report for as long as they're open.
If you have a credit card through your old financial institution and it's the oldest credit card you have, closing it can cause your credit score to drop a bit. Unless you're paying fees or high interest rates on the credit card account, you might want to think about keeping it open.
Don’t Switch Financial Institutions if You Have a Negative Account Balance
If you're switching financial institutions because you have a negative balance at your old institution, don't be surprised if they hire a collection agency to recover the balance owed. Being turned over to collections for any reason can really hurt your credit score, not to mention your ability to open up a new checking or savings account in the future.
Avoiding this situation is pretty easy—just maintain a positive balance in your bank account. If you do have a negative balance in your current account, make sure to pay it off and have a positive balance before you even think about getting a new checking or savings account.
Get Help Switching Financial Institutions With First Alliance Credit Union
Switching to a new financial institution usually doesn’t affect your credit score. However, you should make sure your old account has a positive balance before switching, and make sure you have all your electronic bill pay information transferred to your new account. You might even want to keep your old bank or credit union account open if it's home to your oldest credit card account.
If you need help switching financial institutions, including becoming a member of First Alliance Credit Union, you can find a lot of help in our resource center. Our guide to switching financial institutions will help you through every stage of transferring your accounts, and you can also download a free switch kit to help make the process easier.