The following is a guest post from DR, the founder of the popular personal finance site, the Dough Roller.
Your credit score plays a significant role when you apply for credit. Whether you are looking for a mortgage, car loan, or credit card offer, your credit history will in large part determine the interest rate for which you qualify. Prospective employers often evaluate credit scores and credit history. Auto insurance companies consider your credit when quoting insurance premiums. Your credit score can even determine whether you qualify for a cell phone contract.
What surprises many, however, is that banks often review your credit score when you apply to open a savings or checking account. This may seem odd because a bank account generally does not involve an extension of credit. Yet some banks will turn down an application for a savings account if the applicant does not have good credit. Let’s take a look at an example of a bank that evaluates the credit of applicants, and then will discuss why some banks take this approach.
You probably don’t spend a lot of time reading deposit account agreements. As an attorney for nearly 20 years, I’ve spent more time than I care to admit reading through dense contracts. And when it comes to consumer agreements, you’d be surprised what you can find hidden in these contracts that can have a big impact on your wallet.
As an example, let’s take a look at the Ally Bank Deposit Agreement. If you visit Ally’s website, and scroll to the bottom of the page and click on the link for “legal,” you can download the Deposit Agreement. If you then scroll down to the third page of that agreement, you’ll see a heading titled, “Deposit Agreement and Disclosures.” Then find part B, “Account Basics,” and subpart 1, “Who Can Open Account.” If you are still with me, take a look at the third bullet point, which reads as follows:
Credit Reports and Other Inquiries: We may use credit reports or other information from third parties to help us determine if we should open your account.
So the big question is why would a bank consider credit history and credit scores before opening a deposit account. There are several reasons. First, banks do extend credit with certain types of accounts. For example, checking accounts can come with overdraft protection, which is a form of credit. Before extending this credit to a customer, banks evaluate credit history similar to any extension of credit.
Second, your credit history can be used to extend additional financial offers to you in the future. While you may be applying for a savings account today, the bank may market credit cards, mortgages, or lines of credit to you in the future. Banks will target these offers based on your credit history and credit score.
Finally, an applicant’s credit history enables banks to evaluate the profitability of each potential account holder. Much like auto insurance companies use credit history to assess risk, banks can use credit history to predict how a customer will use a deposit account. For example, a bank may conclude that a higher credit score is an indicator that an applicant will deposit more money into the account than a person with a lower credit score.
A bank’s use of your credit history is just another reason why it’s so important to protect your credit. Even if you have no plans to borrow money, your credit score can affect many areas of your finances. So if you don’t know your score, it’s easy to get your free FICO score online and to monitor your credit over time.