Switching banks and your credit score

Switching banks can look like an easy win — better interest rates, better terms, a few perks. But leaving one bank for another can knock your credit score, mostly because of the credit checks banks run before opening a new account.

A quick recap on how scores work#

When a lender looks at your credit report, they are not looking at the score you see when you check it yourself.

The score shown on the reports held by Experian, Equifax and TransUnion is mostly there for your benefit — an indication of how your financial and borrowing information might look to a prospective lender.

Lenders instead read your report as a whole and calculate their own score using their own systems and criteria.

Which is partly why a lower score doesn't shut you out of credit altogether. Some lenders specialise in customers working to build healthier credit; they simply lend on different terms.

How switching actually affects your score#

The basic act of moving your account doesn't affect your score at all. Two parts of the process can, though:

1. Opening the new account usually triggers a credit search, often a hard one.
2. Closing the old account can cost you positive credit history and shift your credit utilisation temporarily.

Opening a new account usually means a hard search#

You probably know that applying for a credit card can affect your score because of the hard search involved. The same applies when you open a new bank account, particularly one with an overdraft facility.

Some banks only run a soft search; others run a hard search, accessing your full financial history. There's sometimes a slight temporary dip after a single hard search, but your score recovers quickly as long as you keep up your other credit obligations.

Too many hard searches tells lenders several unhelpful stories at once. It can suggest financial trouble, over-reliance on credit, or repeated rejections. It can equally suggest a stream of approvals and access to a large amount of credit, raising questions about whether you can stay on top of it all. Either way, it creates uncertainty around risky borrowing.

The result may be a declined application — or an approval on less favourable terms, such as a higher APR or a lower credit limit.

Before you open a new account#

• Use online eligibility checkers before making a formal application, to check you're applying for the right account and one you're likely to be approved for. That's how you avoid unnecessary hard searches.
• Find out which type of search they'll run. You do have to give permission for a hard search, but that permission is often buried in the terms and conditions rather than made obvious. If the account has any kind of credit attached, expect a hard search.
• Check your credit report is correct and that you're registered on the Electoral Roll, to give yourself the best chance of approval.

Closing your old account matters too#

Switching usually means closing the account you're leaving, and that has its own effects.

An account with a positive history of regular payments is an asset on your credit report. It's evidence of healthy borrowing, and it can only help your score.

Before you close the old one#

• Check what you'd be giving up. Some banks offer benefits and rewards to long-standing account holders. If your new bank doesn't match them, it might be worth keeping the old account open.
• Make sure it's paid up and in good order before you close it.

Whether closing it registers at all#

It depends on whether the account was ever reported to the credit reference agencies.

For most people a basic bank account is their first relationship with a financial institution, often opened in childhood. Later comes a current account, usually with an overdraft attached — and because an overdraft is a form of debt, it's certain to be reported whenever the account is overdrawn.

Closing a current account that has been reported can cause a slight drop, but it should only be temporary. If the account was never reported, closing it won't affect your score at all. You can check which of your accounts are reported by looking at your credit report.

Whether an account appears at all three agencies or only one depends on whether there's a reciprocal agreement in place — two companies agreeing to share data with each other.

Some things never appear on your file at all: Council Tax, savings accounts, employment and income, student loans, and any credit history more than six years old.

What else to weigh up first#

Opening a joint account changes the calculation. If you open a current account with a partner, their credit history affects the outcome of your application. Opening a savings account together — creating a financial association — shouldn't expose you to their adverse credit. But for any credit-carrying account, lenders will want to see their history too. A high score on their side reflects well on you; the reverse is equally true. Check their borrowing history before applying, so a rejection doesn't leave an unnecessary hard search on your file.

Timing matters. If you're planning a big loan or a mortgage application in the next six months or so, it's worth holding off. You'll want your credit report looking as clean as possible, without unnecessary hard searches on it.

Hard searches and soft searches#

Two kinds of search can be run on your credit report.

Soft searches come in two forms:

• Audit checks are created when you check your own report, or when an existing lender runs routine checks on your finances. These aren't visible to anyone else.
• Enquiry searches are run by prospective landlords, employers or lenders as a pre-screening tool, usually just to verify your details. These are visible to others viewing your report.

Neither soft search will harm your credit score, unless carried out as part of debt collection.

Hard searches are visible to other lenders and can potentially harm your score. A single one usually causes a slight dip that bounces back. Too many in too short a time has a longer-lasting effect, because it suggests someone struggling to manage their finances. Lenders can't see whether your applications succeeded — so a run of searches may be read as a run of refusals.

How long searches stay on your report#

This varies by agency. Each of the three gathers and analyses credit information independently using its own systems, which is why you have three reports and three scores.

After that, hard searches drop off naturally.

A lender may check one agency or all three, which is exactly why seeing all three at once — in an easy-to-compare format — is useful.

Credit checks sound daunting, but they're a normal, expected part of financial life. Almost all of us will have one at some point.

The key things to remember#

• Switching itself is harmless; the search on opening and the closure of the old account are what count.
• One hard search causes a temporary dip that recovers.
• Many hard searches over a few months can do lasting damage.
• Use eligibility checkers before formally applying.
• Check whether the bank runs a hard or soft search — it's often buried in the T&Cs.
• Closing an account only affects your score if it was reported in the first place.
• Current accounts with overdrafts are almost always reported; savings accounts aren't.
• Council Tax, income and student loans never appear on your file.
• A joint current account brings your partner's credit history into the decision.
• Hold off switching if a mortgage or large loan is within six months.
• Experian and Equifax keep hard searches for a year; TransUnion for two.