Dedicated to Deposits: Deals, Data, and Discussion

Why Banks Check Your Credit Score for Deposit Account

POSTED ON BY Guest Post

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.


Comments
19 comments.
Comment #1 by Anonymous posted on
Anonymous
And why does an employer do it?

3
Comment #2 by Anonymous posted on
Anonymous
@1 :  because the higher your debts, the higher the chances you'll act like the mindless slave they want you to be.  debt = fear = obedience

7
Comment #3 by Mark (anonymous) posted on
Mark
How about the insueance companies, they will increase the rates if your score is low.

Any logic to it?

2
Comment #4 by Anonymous posted on
Anonymous
insueance companies will increase your rates if your spelling is bad.

10
Comment #5 by Anonymous posted on
Anonymous
I think employers would prefer to hire the applicant with the higher credit score if they qualify in all other ways.  A high score shows the applicant is mature enough to care about their personal finances.  Maturity goes a long way in doing a good job, IMO.

3
Comment #6 by Anonymous posted on
Anonymous
Anonymous #5,

Not necessarily true.  A low credit rating doesn't always indicate irresponsibility.  A person who rents and pays with a good check or cash for everything else has no credit rating or a poor credit rating.  Great reward for being frugal with my money and living within my means for years!!!!! 

I'm not trying to brag.  Just pointing out this "Credit Rating" business doesn't always show the real picture of a persons finances, maturity or personal responsibility. 

4
Comment #7 by Anonymous posted on
Anonymous
Got to love our worthless congress. Everything to **** over the people they are supposed to represent and everything to protect these filthy banks. All of your money going to bail them out and provide big bonuses while the middle the middle shrinks into oblivion. Good job congress, keep ****ing over your people.

3
Comment #8 by lou posted on
lou
Okay, I understand why they use your credit score to evaluate your creditworthiness for a loan , credit card or overdraft privileges, but to look at it when opening a deposit account is stupid. Either our worthless govt. should outlaw this practice or the abusive credit agencies should not harm your credit score for a hard inquiry linked to a deposit account opening. This makes no sense and the practice needs to stop. There are many other ways for banks and credit unions to identify a depositor without resorting to this practice. Everytime they use this as an excuse, it makes my blood boil.

5
Comment #9 by Anonymous posted on
Anonymous
Banks have privitized the assets and socialized their loses w bail outs.

3
Comment #11 by Anonymous posted on
Anonymous
You gotta love our voters.  They can't decide which party they want, so they flip flop every few years. 

So, everything goes to crap because there's no long-term vision.  And, then, they complain because they sent the guys in who did it!

13
Comment #12 by Anonymous posted on
Anonymous
Yes, you gotta love some of the voters.  They complain about all the corruption in Washington and that the politicians are not doing the will of the people they are supposed to represent.  Then these very same complainers vote the incumbents right back in office.  Go figure?

2
Comment #13 by Dough Roller (anonymous) posted on
Dough Roller
In response to comments above, insurance companies (auto insurance in particular) look at credit history/score because studies show a high correlation between our credit history and claims activity.  Many consumer groups object to the practice of using credit history to set premiums, but it's a practice followed by most all of the major insurance carriers.

As for employers checking your credit history, there is a wide variance of practice from industry to industry and company to company.  Your credit history will absolutely be checked if you are seeking a security clearance or a job that entails some level of fiduciary duty, such as a stock broker.  And the practice of a potential employer checking credit history seems to be expanding.

3
Comment #14 by Anonymous posted on
Anonymous
@#2 You ain't kidding. I quit a job at a Asset Mgmt firm and my boss made a joke, "Serves me right for hiring someone who doesn't have a mortgage" And it was one of those half-kidding jokes. I really don't think she was kidding. If I had a mortgage, in her mind, she thinks I wouldn't have been so hasty to quit. And she might be correct.

1
Comment #15 by overseas US person (anonymous) posted on
overseas US person
An interesting article that raises a problem many overseas-based US citizens must deal with. Banks generally refuse to open accounts for non-resident US citizens claiming security reasons or regulations contained in the Patriot Act. Not true. The law does not prohibit banks from opening accounts for non- resident US persons. That said, banks that do agree to open savings accounts for overseas-based Americans eventually reject the application because of lack of a credit score (a recent US address is obligatory). There seems to be no way out of this cunundrum.

2
Comment #16 by Will (anonymous) posted on
Will
It's unfortunate for many people that banks are willing to exclude large segments of Americans from their customer base because of credit scores. I heard that @ 20-25 percent of Americans have credit scores below 600. Can anyone say "recession"? Fortunately, there are a few alternatives for those who have a hard time getting a bank account.

2
Comment #17 by Anonymous posted on
Anonymous
Can a bank use a credit score for determining the risk of holding a check or cashing it?

1