It doesn’t matter if you’re opening your first brokerage account or have many years of investing experience, it’s common to have questions.
For some, the most important question is “Does opening a brokerage account affect credit?”
In this article, we answer this question (among many others).
MoneyLion offers a fully managed portfolio that requires no management fees or minimums.
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 is not 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.
Does investing in stocks affect your credit score?
Investing in stocks, like buying and selling stocks, alone won’t affect your credit score because these activities aren’t reported to credit bureaus.
However, using a margin account, which involves borrowing money from your brokerage, could impact your credit score due to the associated credit checks and potential debt.
What is a margin account and how will it affect my credit score?
A margin account allows you to borrow money from your brokerage to buy more stocks than you could with your available funds. This borrowing is essentially a loan, which can lead to a hard credit inquiry when you open the account, potentially lowering your credit score temporarily.
Additionally, failing to repay the borrowed funds can negatively impact your credit score due to the increased debt and potential missed payments.
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 help improve your credit score. Credit bureaus look at payment history from your loans, credit cards, lines of credit, and other financial products. A late payment could 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 a credit utilization rate below 30%, with a rate below 10% 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 unnecessary. 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. However, the credit mix only makes up 10% of your score. It helps, but you should not incur debt to build 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.
With this knowledge, you can take steps to increase your credit score.
The Truth About Brokerage Accounts and Credit Scores
While buying and selling stocks won’t affect your credit score, using a margin account can have implications.
Regularly checking your credit report ensures accuracy and protects your financial health. Understanding how financial actions impact your credit helps you make smarter decisions and maintain a strong credit profile.
FAQ
Can I buy stocks with a credit card?
You cannot generally buy stocks directly with a credit card. Most brokerage firms do not accept credit card payments for stock purchases due to the associated risks and fees.
Does opening a brokerage account affect credit?
Opening a brokerage account usually involves a soft credit inquiry, which does not impact your credit score. However, applying for a margin account might involve a hard inquiry that can temporarily lower your score.
Does closing a brokerage account affect credit?
Closing a brokerage account does not affect your credit score since brokerage accounts are not typically reported to credit bureaus. It’s different from closing a credit account, which can impact your credit utilization ratio and score.
Does trading stocks affect your credit score?
Trading stocks does not affect your credit score because credit bureaus do not report these activities. Your credit score is influenced by factors like payment history, credit utilization, and account age.
