Investing is a great way to make your money work for you, but it always involves some level of risk. While there's always a possibility of adding revenue, there is also a very real chance of losing money along the way, whether that is through the stock market or another type of investment. Given this unpredictability, you might be wondering how much, if any, will investing affect your credit score.
In this article, you will learn:
- If investments affect your credit score
- If buying or selling stocks affect your credit score
- What a margin account is and how it can affect your credit score
- What to focus on when building credit
Does opening an investment account affect your credit score?
Investments encompass a wide range of mediums, which can include real estate, art, investing in a small business. They can also be the financial investments you make during your day-to-day, such as savings accounts, a 401(k), stocks, bonds, mutual funds and more.
Generally, investments do not directly affect your credit score. In fact, they may not appear on your credit report. However, like many other financial decisions you may make, they can indirectly affect your score.
Investments can indirectly impact your credit score
For example, if you aren't careful, and put too much of your income towards investing, you could risk losing your funds to the point where you can no longer make other important payments (such as credit card bills). Missing these payments can lower your credit score, since payment history is one of the largest factors that goes into calculating it. This is why budgeting and being able to pay for your daily expenses before committing a large portion of your income to investments is essential.
Additionally, if you end up relying more on your lines of credit to pay for important items, you could be increasing your credit utilization ratio, which is the percentage of how much of your credit limit you use. Increasing this ratio could hurt your score further.
On the other hand, if your investments generate more revenue, you could begin paying off debts and relying less on your credit cards to make your payments. This could help improve your credit score as you have more money to make your payments on time, pay off your debts and more.
Does buying or selling stocks affect your credit score?
Like other forms of investments, buying or selling stocks won't directly change your credit score, but they can indirectly affect it. However, there is an exception — margin accounts.
What is a margin account?
According to Experian™, a margin account is a type of "brokerage account that gives you a line of credit you can use to buy stock." Instead of using your own funds, you're using a line of credit issued by the brokerage firm to pay for your stocks. In this example, a brokerage firm acts much in the same way a bank or other financial institution would. This is a high-risk form of investment, generally used only by experienced investors.
How it affects your credit score
If you open a margin account, the lender may run a hard inquiry — this will temporarily decrease your credit score.
About $2,000 is the minimum requirement for establishing a margin account -- most brokerage houses require this before opening a margin account. While the advantages of opening a margin account can be appealing — such as the potential to have a higher return — there can be consequences.
Most margin traders leverage their existing stock market account. If you have $50,000 in the stock market and you lose your margin investment and owe $25,000, the broker will demand payment and force you to sell shares that will equal the money owed --- meaning that you often have to sell stock at a loss. This could destroy years of careful stock accumulation. If you're struggling to pay back your debts, this could appear on your credit report as a derogatory remark and hurt your credit score.
What to focus on when building credit
Your mind might be racing about all the ways you can build your credit and how your investments could be indirectly affecting it. Take a moment to pause, and remember that strong credit is built up over time, with healthy, savvy habits. Establishing credit is not necessarily about taking out multiple credit cards or making several kinds of big investments through a brokerage account.
Think about what you want your credit to do — do you want a good score to buy a house, a car? A higher credit score could be the difference when it comes to saving thousands of dollars because you could get a lower interest rate. You might want to set up a score goal using the credit planning tool through Chase Credit Journey®. With this free online tool, you can receive a personalized action plan provided by Experian™ to help improve your credit score by a minimum of five points. Additionally, you can receive your credit score for free anytime, anywhere and enroll in free identity and credit monitoring services.
If you're thinking about adding to your credit portfolio by taking out a new card or loan, make sure you have enough funds to cover costs and monthly payments. This way, you won't hurt your payment history while taking out more lines of credit.
The bottom line
If you're considering investing as a way to build revenue and indirectly improve your credit, remember that you shouldn't risk more than you can afford to lose. Additionally, if you do decide to invest, find a time for getting out that works for you. After all, the goal is to ultimately turn your investment —however big or small — into hard cash that will help you create the life you want.
Everyone's situation is different, and each individual has a tolerance for risk that's unique to them. Your goal as an investor is to determine your comfort level, both in terms of the money underpinning the investment and the amount of time you're willing to let your investment grow before cashing out.