Your credit score is a significant number that dictates how much money you will save on loans and how much you can borrow. Many people work on their credit scores as they get closer to applying for loans and other financial products. A high credit score can help you become wealthier earlier. Investments achieve the same objective, but some wonder how investments and credit history mix, if at all.
Does opening an investment account affect your credit score?
Most brokerage providers do not require credit checks to open an investment account. Since you don’t need a credit check, investment activity does not get reported to the credit bureaus. The major credit bureaus use the credit scoring system to assess how effectively consumers can manage debt. An investment portfolio does not reflect your ability to handle debt. Credit bureaus consider other factors and financial details when determining your credit score.
Factors that influence your credit score
Credit bureaus review numerous financial transactions to assess credit scores. All of those items originate from one of these five categories.
Payment history
Payment history is the largest component of your credit, making up 35% of your score. Incurring debt and paying it on time will improve your credit score. Credit bureaus look at payment history from your loans, credit cards, lines of credit, and other financial products. Making a late payment will hurt your score, and a series of late payments can make a significant dent. Only take on as much debt as you can afford to pay on time.
Credit utilization rate
The credit utilization rate measures your debt against your credit limit. If you have a $1,000 balance on your credit card and a $2,000 credit limit, you have a 50% credit utilization rate. Credit bureaus prefer to see a credit utilization rate below 30%, with a rate below 10% being ideal. You can improve your credit utilization rate by paying off debt or getting a higher credit limit. Requesting a higher credit limit will trigger a hard inquiry which will take your score down a few points in the short term. If you can keep your credit utilization rate below 30%, asking for a higher credit limit is not necessary. Credit utilization makes up 30% of your credit score.
Length of credit history
The age of your credit history reflects your experience with managing debt. If you have a line of credit that is over 10 years old, it shows you have navigated through more economic cycles and challenges. You should keep your old accounts and lines of credit open, even if you no longer use them. Consumers can’t do much other than wait for their credit history to get older and avoid closing their oldest accounts. Your credit history’s length makes up 15% of your score.
Types of credit
Having multiple credit lines and loans increases your credit mix. Credit bureaus like to see you utilize several financial products instead of only one. Having a mortgage, auto loan, credit card, and other types of credit will improve your credit score. Credit mix only makes up 10% of your score. It helps, but you should not incur debt for the sake of building your score.
New credit applications
New credit applications also make up 10% of your credit score. Most lenders conduct a hard inquiry when you ask for a line of credit. This credit check gives the lender more information that helps them decide on your application’s approval or rejection. A hard inquiry will decrease your score by a few points. A single hard inquiry won’t do much to your credit score, but applying for too many loans over several weeks can hurt your score.
How to monitor your credit
Monitoring your credit helps you assess your progress. Consumers can request their credit reports from any of the major credit bureaus. You can obtain a free credit report from each bureau once every 12 months. You can get three credit reports per year if you make separate requests to Equifax, TransUnion, and Experian and check for any errors. If you detect errors and dispute them.
Fortify Your Financial Health
Building your credit score can lead to better financial opportunities. You can qualify for higher loan amounts, increase your chances of getting approved, and receive lower interest rates. Opening an investment account will not affect your credit score, but this account can help you build wealth. Investing in assets and building your credit score can accelerate your path to financial freedom.
FAQ
Can I buy stocks with a credit card?
You can use a credit card cash advance to obtain funds. Those proceeds can go towards stock purchases, but you will have to pay a fee to get the cash advance.
Does opening a brokerage account affect credit?
Opening a brokerage account will not affect your credit score.
