Does Opening a Brokerage Account Affect Your Credit Score?

Your credit score is one of the most important numbers in your life. It determines whether you will get approved for loans, credit cards, and rental agreements. So, naturally, most people do their best to protect it. How? Making payments on time, keeping their credit card balance in check, and managing debt wisely, among other things.

But beyond all that, have you ever wondered if any other part of your financial lifestyle (like investing) affects your credit score?

In this guide, we’ll explore whether opening or having a brokerage account affects your credit score. We’ll also explain how brokerage firms handle credit checks and everything you need to know before opening a brokerage account.

Understanding Credit Scores

As an Aussie, your credit score is a four-digit number representing your “creditworthiness” (in simple terms, how reliable you are with debt). It might just be a number, but it plays a significant role in your life. Why? Because lenders, landlords, and even some employers use it to assess how responsibly you manage debt and make financial decisions.

Credit scores typically range from 0 to 1,200, but the exact number depends on the credit reporting agency. Generally, the higher your score, the more confident lenders feel about your ability to pay back debt. In other words, a good credit score makes it easier to get approved for loans and land better interest rates.

Understanding Brokerage Accounts

If you actively invest, you already know that a brokerage account is your gateway to the financial markets. But if you’re just getting started, here’s the gist: a brokerage account is an investment account that allows you to buy and sell assets like stocks, ETFs, forex, and other securities. Think of it as a regular savings account, but instead of holding cash, it is designed for investing.

There are different brokerage accounts, including standard cash accounts, where you trade using your own money. Similarly, forex trading broker accounts provide platforms for trading currencies, and some may offer leverage, which allows you to borrow funds to increase trading power. Many different brokerage accounts offer varying features and benefits, making them useful depending on your needs as an investor.

Do Brokerage Accounts Impact Credit Scores?

The simple answer is no, but hold on, there’s much more to it.

Ordinarily, opening a brokerage account won’t affect your credit score because investment accounts aren’t tied to borrowed money (credit). So, unlike credit cards or loans, brokerage accounts, whether for stocks, Exchange-Traded-Funds, or forex, are typically cash-funded, meaning you’re not taking on debt when you invest.

However, certain aspects of how you manage a brokerage could have an indirect impact on your credit score. Here are some of those ways:

• If you borrow money to invest (known as margin trading), the brokerage or forex broker may check your credit, which could result in a hard inquiry (a process that often reduces your credit score slightly).
• How you fund your brokerage account matters. If you use a credit card or personal loan to deposit money into your brokerage or forex account, it could increase your credit utilisation, which has an impact on your credit score.
• If you fail to repay a margin loan or any other fees owed to your brokerage or forex broker, the debt could be sent to collections, damaging your credit score.

So, while opening a brokerage or forex trading account itself won’t impact your credit, how you choose to fund and manage it can. 

Do Brokers Perform Credit Checks?

It depends. It boils down to the type of brokerage account you’re opening.

Most standard brokerage accounts don’t require a credit check at all. However, suppose you’re applying for certain investment accounts, like a margin or a forex trading account with leverage. In that case, the broker may check your credit to assess risk.

What then matters is the type of credit check the brokerage decides to perform. There are two types: soft inquiries and hard inquiries.

Soft vs. Hard Credit Inquiries

A soft inquiry (or soft pull) is a background check that doesn’t impact your credit score. It’s often used for identity verification or pre-approvals. Many brokers perform soft inquiries when you sign up to confirm your identity and comply with regulations. These checks don’t appear on your credit report for lenders to see, so they’re harmless.

On the other hand, a hard inquiry (or hard pull) happens when a company checks your credit because you’re applying for a form of credit, like a loan or credit card. Hard inquiries can lower your credit score slightly, especially if you have multiple in a short period.

When Do Brokers Perform a Hard Inquiry?

Most brokerage accounts don’t involve hard credit checks, but there are exceptions:

• Margin accounts: If you want to trade on margin, your brokerage might run a hard inquiry to assess your creditworthiness. Since margin trading involves debt, brokers want to ensure you’re financially responsible before lending you funds.
• Credit-based investment accounts: Some brokers offer special accounts that provide lines of credit backed by your investments. Applying for one of these could trigger a hard inquiry.
• Brokerage-linked credit products: If your broker offers additional financial services, such as a securities-backed loan or an investment-backed credit card, they may check your credit before approving you.

Smart Investing Without Hurting Your Credit

Your brokerage account should be a tool for building wealth, not a risk to your credit score. This should inform how you invest because using your credit card recklessly or taking on margin debt without a plan can really affect your credit score, which can translate to financial strain. Your smartest move? Stick to responsible funding methods, know when a broker might check your credit, and focus on long-term growth instead of shortcuts.