What is a current account?
High street and app-based banks offer current accounts for day-to-day banking. You can deposit and withdraw cash, set up Direct Debits and other payments, and make bank transfers to other accounts.
Some bank accounts are free, while others charge a monthly fee in return for a package of benefits.
Why is switching current accounts a good idea?
One of the main advantages to switching current accounts is the cash incentive that many banks offer to new account holders.
Switching bank accounts to pocket £200 or so might sound great, but in some circumstances, it can harm your credit score.
What is a credit score?
Your credit score is a number that represents the risk you pose to lenders when you borrow money.
The higher your score the better, as it will make it easier to borrow money at competitive interest rates.
Does switching banks affect your credit score?
Whether opening a new bank account will affect your credit score depends on several factors.
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Will the bank carry out a soft or hard credit check?
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Are you applying for an overdraft?
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Can you show stability?
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Will Direct Debits be transferred across?
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Are you opening the new account jointly with someone else?
Hard and soft credit checks
When you apply to open a new bank account, the bank will carry out either a ‘soft’ or ‘hard’ credit check.
A soft check is usually used to confirm your identity, while a hard check will look at your finances in more detail.
A hard check can cause a temporary dip in your credit score. Multiple hard credit searches in a short space of time can have a more negative effect on your score.
Overdrafts and credit scores
An overdraft is a way to borrow money from your bank using your current account – it takes your account balance below zero.
Simply having a modest overdraft facility agreed is unlikely to affect your credit score significantly. If you don’t use the overdraft, it will appear on your credit file as a balance of zero.
Having access to a larger overdraft could potentially increase your credit score as, if you kept your spending the same, it would lower your credit utilisation ratio.
You can read more about how an overdraft affects your credit score here.
Stability
Being seen as ‘stable’ is good for your credit score.
Lenders see sticking with one bank for a long time as a sign of stability, so changing accounts frequently may not be good for your credit score.
But if you have a good credit score and can show stability in other ways – by being on the electoral roll, for example – switching bank accounts will only have a minimal effect on your score.
Direct Debits
Most cash switching incentives require you to use the Current Account Switch Service (CASS) to change banks. This process will move all your Direct Debits and standing orders to your new bank and close your old account down.
This process usually goes smoothly. But if it doesn’t, it’s possible that a Direct Debit for a household bill or other payment won’t be paid, and this can impact your credit score.
Joint accounts
If you open a current account jointly with another person, that person’s credit score will affect yours. This is called a ‘financial association’.
So, if you open a bank account with someone with bad credit, your score can fall as a result.
When you shouldn’t switch bank accounts
It’s important to consider your credit score when weighing up switching bank accounts.
If you plan to apply for a mortgage or large loan in the next six months or so, it might be better to delay switching current accounts until afterwards.
You should also think carefully before opening a joint account with someone with a poor credit score or who you don’t completely trust.
Does a savings account affect my credit score?
Perhaps surprisingly, having savings or a savings account does not affect your credit score either way.
Your credit report does not show how much money you have in savings or investments.
Does closing a bank account affect my credit score?
Closing down a bank account won’t affect your credit score as long as you settle your account first.
This means paying off any overdraft and keeping an eye out for any pending transactions that could bring your balance below zero after the account is closed.
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Disclaimer: All information and links are correct at the time of publishing.
Emma Lunn
Personal Finance Writer
Emma has been writing about personal finance for 20 years. She's passionate about helping people make better money decisions so they have the time and money to focus on the things they love. For her, that's racket sports, hiking, and travel.
