Does switching banks really affect your credit score?

Switching banks can affect your credit score. Keep reading to learn how, and what you can do to minimise any damage from switching banks.
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Getting £100-200 just to switch your bank account seems like easy money. But you’re savvy enough to know that when a bank offers you free money, there’s usually a catch. Switching bank accounts can affect your credit score and have a number of other implications for your financial stability.

In this article, we’ll dig into how hard credit checks affect your credit score when switching, other ways switching banks can impact your credit score, and what you should look for when browsing for new banks. Let’s dive in!

Here’s how switching banks affects your credit score

Switching bank accounts can impact your credit score, but how it does depends on what kind of account you open and what you do with your existing account.

Hard credit checks are the main culprit

When you open a new bank account, the bank or building society needs to verify your identity and ensure that your credit report doesn’t show anything suspicious. To do this, they typically run a hard search on your credit file. Hard searches have a minor impact on your credit score, causing it to drop slightly.

If you’re not applying for lots of new accounts or credit lines, a hard search from opening a new bank account will only impact your score for about six months and should only be visible on your credit report for about two years at most.

While this minor impact is usually nothing to worry about, it’s important to keep in mind if you’re planning to apply for another significant credit line in the coming year. The minor drop in your score could impact your eligibility for things like loans, credit cards, and mortgages. However, larger lines of credit like a mortgage typically take a more holistic look at your financial situation, so don’t be deterred from speaking with a lender if you’re looking into a mortgage just a few months after opening a new bank account.

Related read: How long do hard searches stay on your credit file?

Switching banks can impact your credit score indirectly too

Aside from the minor impact of a hard search, switching banks can impact your credit in more indirect ways too. If you don’t update your direct debits, you could damage your credit score by missing payments. This can be easily avoided by using the current account switch service.

Additionally, you could damage your credit score if you close your old bank account, particularly when you have an arranged overdraft or credit card attached to the account. This is mainly because closing those accounts will impact your credit history.

If you’re like many people, your arranged overdraft is the oldest credit line you have. If you’ve kept it in good standing, it can have a strong impact on your credit score, demonstrating that you’ve been on top of your finances for years. But, when you close the account, that history is lost, causing your credit score to drop.

If your account is in good standing and isn’t costing you anything, you may want to simply keep it open to maintain your credit history and a low credit utilisation ratio.

Finally, if you do decide to close your old account, make sure you’ve put it in good standing before closing it. Your account could be sent to collections if you try to close it while it’s overdrawn. That could leave your credit report with a default or County Court Judgment on it, which will have a lasting impact on your credit score.

Related read: How to close a bank account — and six times you should

What to pay attention to when switching banks

Account fees — and not the switching bonus

£200 for switching sounds great. Indeed, many people only pay attention to the bank’s switching bonus when opening a new account. But, if you’re like most people, you’ll be with your bank for years. When you’re looking at your long-term financial goals, a small cash gift doesn’t play a big role.

So, don’t let yourself be distracted by banks’ incentives. Instead, look at the bones of the account you’re planning to switch to and make sure it has a better interest rate, no fees, and an affordable arranged overdraft if you need one.

Your banking preferences

To get the most out of your account, it’s important to be able to use it the way you want. So, before you switch, think about how you like to use your bank. Do you like to go in person? Do you prefer mobile banking? Double-check the following:

  • Is there a branch near you?
  • Does their mobile app have good reviews?
  • What options do you have for customer service? Does the customer service have good reviews?

A bank account that doesn’t meet your expectations can be frustrating. When that happens, you might avoid using it, which can harm your finances and credit score.

Consider your future banking needs

Again, make sure to consider your long-term financial goals. Is your first home purchase on the horizon? Are you planning to take out a loan? Make sure the bank you’re looking into has competitive offerings for the financial products you’ll need in the future.

Worried about your credit score? Strengthen it with Pave

When you open your new account, you’ll want to keep an eye on it and make sure your direct debits are switched over properly. But, it can be hard to find the time to monitor your bank account. Thankfully, the Pave app can do it for you.

We’ll monitor your balance and upcoming bills so you can stay current, avoid late payments, and build a strong credit score. Plus, you might be eligible for a credit builder account that can help you actively improve your score.

If you’re ready to boost your credit score, download Pave and see how you can improve your score, just like 99%* of our users with good credit habits.

Download Pave Today

*The 99% number represents Pave Plus customers who have been with Pave for at least 6 months, and have taken all actions listed in the Pave app while not adding negative markers to their credit file such as late payments or defaults. Pave cannot guarantee an increase in your credit score.