Do Investments affect your credit score?

Whether in property, the stock market, cryptocurrency, or a high-interest bank account, it is always good to try to grow one’s wealth through investments.

However, while some people are put off from doing so by the potential risks involved, especially in the stock market or cryptocurrency, others have a different concern: how will investments affect their credit score?

As your credit score influences what kind of debt or loans you can take on and the amount of money you can potentially borrow, it is a pertinent question to ask. Not least, because a low rating might have a detrimental impact on your ability to take out a mortgage, get an overdraft or even finance a car loan.

So, to educate you on the facts, we’ve put together this handy guide. Hopefully, it will put your mind at ease.

What items do not influence your credit score?

While they might impact your finances, you should be aware that not every single thing you buy or all your personal circumstances will affect your credit score.

For instance, any purchase you make with a debit or credit card will not count against you because credit bureaus do not cross-check purchases made with them. Therefore, you don’t need to worry about what you choose to spend your money on.

Likewise, having a student loan, debt consolidation loan, or being denied a credit card will not concern them, and getting married or divorced will not improve or reduce your rating.

Additionally, investing in equities through a professional brokerage firm is perfectly fine. So, if you want to purchase something like HALO Technologies ASX stocks, you can do so safely in the knowledge there won’t be any consequences.

What factors most affect your credit score?

Now that you know what does not affect your credit score, let’s look at what does.

Some of the factors that can negatively affect you include:

1. Credit card debt

Having an active credit card balance does not automatically affect your credit score, but not paying the minimum repayments on time does.

Your credit card company sets a minimum payment requirement every month, which, if you don’t honour it, can result in financial penalties that can result in even more debt and worsen your credit score.

By contrast, if you are able to always pay what you owe on time, and particularly if you are applying to pay off an additional amount, you might find it will actually improve your credit score.

2. Refinancing your Mortgage

While refinancing your mortgage can save you thousands of dollars in the long run, it could negatively affect your credit score in the short term.

When assessing your application, a mortgage lender will run a credit check, which is subsequently noted on your credit report – but only for 12 months.

Your mortgage rates will likely change when refinancing, so you should use a mortgage calculator to assess the impact of these modifications.

3. Credit utilisation rate

Another important factor that affects your credit score is your credit utilisation rate. Essentially, this relates to what percentage of credit you are borrowing against what is available to you.

The easy way to calculate your rating is to total the current balances and combined limits of all your credit cards.

You then divide the total balance by the overall credit limit before multiplying by 100 to determine your score as a percentage.

For instance, if the current balance of all your credit cards, when added up, is $8300 and the limit is $10000, your calculation would be as follows:

$8300 ÷ $10000 x 100 = 83%

Generally speaking, the higher your percentage, the more negative effect it will have on your credit score.

4. Investing in the stock market

Previously, we said that investing in the stock market through a professional brokerage account won’t negatively impact your credit score.

However, if you are using available credit to do this, then it could potentially affect your score because of the volatile nature of this particular type of investment.

What will most ruin your credit score?

Ultimately, your payment history will have the most telling impact on your credit reports. Subsequently, if you regularly make late or part payments, it could count against you because you are facilitating an increase in debt. 

Even making just one late payment can have a disparaging impact on your credit score, depending on how it is calculated. So, it is important to always try and pay the full amount you owe on time.

How to improve credit score

Improving your credit score is always beneficial, but before you do this, you must determine its current level.

You have a legal right to get a copy of your credit score quarterly for free, and you can access this information from the credit reporting agencies Experian, Equifax, and illion. If you want daily access to your credit score, you can also sign up to Tippla for free. 

To improve your score, you should make a conscious effort to pay your bills on time, cancel your credit card (when fully paid off), consolidate your debts and reduce them as much as you can.

Additionally, you should use online budgeting tools such as Beem, WeMoney, Buddy, and Frollo to better manage your money.