Whether you’re looking for better interest rates or hoping to take advantage of a switching bonus, there are many advantages to changing banks.
But before you open an account with a new bank, you should know that it can affect your credit score.
Some people are unaware that opening a new account can impact their credit score.
A good credit score is crucial if you intend to borrow, including getting a mortgage, in the future.
The good news is that the impact of opening a new current account on your credit score is likely to be short-lived.
We reveal how to open a new current account and how switching banks can affect your credit score.
What is a current account?
A current account is used by most people for day-to-day banking, allowing you to deposit and withdraw cash, as well as manage and transfer your money.
Usually, they are free to open although you may be charged for going overdrawn.
Why would someone consider switching bank accounts?
Various banks offer different services and perks and always hope to attract new customers by offering decent interest rates, useful features or even cash bonuses for switching.
If you decide to switch, then you may be able to use the Current Account Switching Service to open an account with another bank within seven working days.
Any time you open a new bank account, your new bank will look at your credit report before you can switch.
The bank needs to do this to check your identity and assess the risk of lending money to you. This check can affect your credit score.
What is the difference between a soft and hard credit check?
There are two types of credit checks: a soft check and a hard check. Most banks will perform the latter.
We reveal how these credit checks work and how this affects your score.
Soft credit check
This may be used to verify your identity.
A soft credit check is also used by price comparison sites to provide you with quotes or by your bank if you apply for an overdraft.
A soft check will not appear on your credit report or impact your credit score.
Hard credit check
This type of credit check will appear on your credit report and affect your score.
When lenders perform a hard check, they review your credit score to assess how good you are at making payments on time.
This can affect how much money they are willing to lend you.
Companies have to get your permission before performing a hard check, as this will appear on your credit report and can affect your score for up to a year.
If you are frequently having hard credit checks, your credit score won’t have time to recover, and it implies that you are struggling with your finances.
Although it’s important to limit the number of hard credit checks you have, the credit score impact for most people switching bank accounts will be negligible and short-lived.
However, there are some situations where you might want to reconsider whether now is the best time to switch accounts.
Are there any scenarios where you shouldn’t open a new bank account?
As a hard credit check will impact your score for some time, if you plan on taking out a loan in the next year, you might want to avoid switching bank accounts.
This is especially true if you’ve had hard checks on your account for other things, such as applying for a credit card.
For example, if you’re hoping to be approved for a mortgage, you might want to avoid any hard credit checks, including switching bank accounts, for 12 months before you plan on applying.
Your credit score will recover from any hard checks eventually, but it’s worth considering whether you have any essential credit applications coming beforehand.
Can you open a bank account with only a soft credit check?
Yes, some UK banks offer a current account with a soft credit check, including Starling Bank, Monzo and Chase.
But it’s worth flagging if you want to access any additional features, such as an overdraft, you may then need to do a hard credit check.