Can a checking account help or hurt your credit score? In most cases, the answer is neither — it doesn’t connect to business credit at all. However, there are some exceptions, and credit scoring models may be moving in that direction in the future. Here’s a closer look at checking accounts, credit, and the evolving role of cash flow data in assessing creditworthiness.
Do checking accounts affect your credit score?
Checking accounts don’t typically have a positive or negative impact on your credit score. The major business credit bureaus—Experian, Equifax, and Dun & Bradstreet—primarily base their credit scores on how businesses manage tradelines. Bank accounts don’t involve the extension of much credit, so they aren’t included in credit scoring models.
For example, Experian bases its business credit scores on the following factors:
- Payment habits on credit accounts (late payments vs. on-time payments)
- Number of tradelines (loans, lines of credit, credit cards, etc.)
- Outstanding balances on credit accounts
- Credit utilization (the percentage of your credit limit you’ve used)
- Public records
- Company demographics
- Tradeline trends over time
When looking at the major credit reporting agencies for consumers, the same is true. Experian, Equifax, and Transunion all base personal credit scores primarily on an individual’s credit account payment history, credit utilization, credit mix, credit history, and new credit.
That said, Experian launched its Boost program for consumer credit in recent years which allows individuals to connect their bank accounts to their Experian accounts. Once connected, you can add recurring bill payments (phone, internet, etc.) to your personal credit report. As you make consistent, on-time payments, your personal credit score gets a boost.
It’s also worth noting that many banks extend a small amount of credit to business and individual account holders to cover overdrafts. They may also charge fees if you overdraft the account or have checks returned. These can result in a negative bank account balance. If your account goes into the negative and gets closed, it could be sent to a collection agency which would result in a negative mark on your credit report.
What are bank reporting agencies and why do they matter?
While bank accounts aren’t typically included on business or consumer credit reports, they are reported by companies such as ChexSystems, LexisNexus, and Alloy. Usually, they collect information on deposit accounts such as:
- Bounced checks
- Unpaid negative balances
- Involuntary account closures
- Suspected fraud or identity theft
Why does this matter?
When you apply for a business or personal deposit account with a bank or credit union, they’ll often pull one or more of these reports. If negative information is found, you may be seen as high-risk and get denied. For example, if you have negative marks associated with your personal bank accounts, they could cause a bank to deny you a business bank account. However, these reports are completely separate from your credit reports and have no impact on them.
How lenders use your bank accounts to assess loan eligibility
Your checking account information won’t impact your credit scores in most cases, but it will still impact whether you can get a loan. When you apply for financing, lenders often request access to your bank account (through online banking) or ask for three to six months of bank statements.
What are they looking for?
They need to verify your income and often want to see if your cash flow is consistent and trending upward. A lot can be learned by analyzing banking activity. For example, if your balance is growing month after month, it usually means you’re bringing in more cash than you are spending which means you present less risk. On the other hand, if you’re getting down to a zero balance and overdrawing your account each month, that shows you’re experiencing cash flow shortages which presents a higher risk.
While sufficient cash flow is a key factor in getting approved for loans, lenders typically assess it apart from credit. Credit is in one silo and finances are in another.
The Tillful Score is utilizing cash flow data
As mentioned above, most business credit scores today don’t factor in cash flow data from bank accounts—but the Tillful Business Credit Score does. Tillful collects real-time transaction data from both bank and credit card accounts. With the help of machine learning, your score is based on your payment history along with patterns related to your account balances, cash inflow and outflow, overdrafts, and more.
You can improve your Tillful Score by:
- Not overdrafting bank accounts
- Maintaining steady cash inflows and outflows
- Having predictable income and expenses
- Increasing income
- Adding recurring expenses that demonstrate an ability to make regular payments
- Connecting all business bank and credit card accounts
In short, it offers a holistic view of your business’s financial health all in one place.
Is cash flow data the future of credit?
Tillful thinks so. Credit bureaus, lenders, and other companies are showing interest in leveraging richer bank data to better assess credit risk. Many are already doing basic cash flow checks, as evidenced by bank statement requirements. However, cash flow is likely to become more of a factor in credit scoring and underwriting practices, and the technology has better ways of capturing it now. One example on the personal credit side is Experian’s Boost program. Another is Chime which offers checking accounts alongside a personal credit-building program.
Additionally, many e-commerce platforms and payment processors use cash flow data to qualify users for their lending programs. For example, Stripe and Shopify both monitor the sales of their users and offer them loans based on their cash flow trends—not considering credit scores at all.
The pros and cons of cash flow data affecting credit scores
For many businesses, cash flow data is available long before credit data. Businesses start making sales and gain the ability to repay loans, but don’t have any credit track record to prove it. If cash flow data from bank accounts helped to establish a company’s credit file, they could potentially qualify for financing sooner.
For example, say you’ve been in business for six months and your bank account shows that net revenue has increased each month. If your growth was reported to the credit bureaus and factored into your score, you might be able to secure a loan.
However, as it currently stands, revenue growth doesn’t have any impact on your credit score. As a result, in the above situation, traditional lenders would see no credit score and no credit history which often means no financing. Today, you typically need to open a secured credit card with a deposit or rely on your personal credit to begin building credit as a business—regardless of your profitability.
On the flip side, if you’re having cash flow problems but have always repaid your tradelines in the past, having your cash flow factored into your credit score could hinder your ability to get financing. It could raise red flags for lenders. While this could be a drawback, it could also potentially prevent business’s from getting loans when they’re in financial trouble.
FAQs about bank accounts and credit scores
Still have questions? Here are answers to some FAQs about credit building and checking accounts.
Do banks check your credit to open a business or personal bank account?
Banks and credit unions don’t typically perform a hard credit check when you apply for a checking or savings account. However, most will screen your banking history by pulling your ChexSystems report, and some may perform a soft pull of your credit report. In the case of business bank accounts, banks would check the ChexSystems reports of those who are liable for the account.
What is the difference between a hard inquiry and a soft inquiry?
A soft inquiry is a review of a personal credit account which is often performed to prequalify a borrower or applicant for an account. It does not get recorded on personal credit reports and doesn’t impact scores. Hard inquiries, on the other hand, are required when applying for credit and certain services. They do get recorded on personal credit reports and have a negative impact on personal credit scores.
Will it hurt your credit score to open or close a bank account?
Bank accounts aren’t generally reported on credit reports, so opening or closing one won’t usually impact your credit score. However, if you close one with an outstanding negative balance, it could get sent to collections which would hurt your credit score.
Why will banks deny you a checking account?
Your application for a business or personal checking account may be denied if your ChexSystems or other report contains too much negative information. Legitimate information typically stays on the reports for five years and you can request one free copy of your report each year to keep tabs on it.
What is a Telecheck report?
Telecheck is a consumer reporting agency. Like ChexSystems, it collects data related to bank accounts, but it’s mostly focused on tracking an individual’s check-writing history. Financial institutions and retailers may check with Telecheck before approving you for a bank account or accepting a check from you.
If I have overdraft protection will overdrafts be recorded on my ChexSystems/Alloy/LexisNexus report?
Overdraft protection is typically a feature offered by banks or credit unions. It means the financial institution will cover certain overdrafts and won’t charge you any overdraft fees, but it doesn’t necessarily mean that the institution won’t report your overdraft activity. However, bounced checks or overdrafts are generally only reported after multiple instances.
Can a bank account get sent to a collection agency?
If you overdraw a bank account, don’t pay the negative balance, and your account gets closed, the account could get sent to collections. The financial institution gets to decide how to handle it. If it does go to collections, it can result in a negative mark on your credit report and a drop in your credit score.
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