While everyone’s circumstances are different, there are some standard recommendations everyone will hear if they ask a financial expert for advice:
- Make and stick to a budget
- Maintain an excellent credit score
- Invest for the future
But, what if working on one of these worthwhile goals negatively impacts another one? Can that even happen? For example, many people are concerned about how various investments may affect their credit score. After all, investments may prove to be a wise use of your money in ten or twenty years, but your credit score impacts your financial health right now.
Let’s review the three most common investment types to see how they affect the investor’s credit.
Stocks
When most people first think about “investing”, stocks are what come to mind. Stocks are shares in various publicly traded companies that return a dividend based on the company’s performance. While the stock market fluctuates a lot in the short term, investing in stocks has proven to be a fairly reliable choice since 1926. From that year on, stocks have averaged about a 10 percent return every single year.
For many years, the only way to invest in stocks was to sign up with a Wall Street brokerage firm and have a broker handle your transactions for you. These days, many online stock-trading accounts are available that allow you to control your own transactions, sometimes at a better price.
How you approach buying and selling stock will affect whether or not your credit score is impacted:
- If you sign up for a stock-trading account online, the company you’re doing business with will run a hard inquiry on your credit report to verify your identity and determine whether you are financially responsible. Any hard inquiry is likely to drop your credit score by one to three points. A lot of hard inquiries in a short amount of time can significantly harm your score.
- If you sign up with a brokerage firm for a normal stock trading account, they will not need to perform a hard inquiry on your credit report, so there will be no negative impact on your score.
- However, if you apply for a margin account — allowing you to buy stock using money borrowed from the broker — they will likely run a credit report, which will count as a hard inquiry.
Bonds
Bonds are generally considered a very safe investment, although the returns are usually smaller than stocks. When you invest in bonds, rather than buying shares that appreciate or depreciate based on the company’s performance, you are loaning the company (or government) money, which they agree to pay back to you with interest when the bond “matures.”
Therefore, for the purchase of most types of bonds, there will be no impact on your credit score, and neither will your credit score affect your ability to invest in bonds. While the parties selling the bonds may choose to use a credit check as a means of verifying identity, it will be a soft inquiry, which does not lower your score.
Mutual Funds
Mutual funds are collections of various investment vehicles, including stocks and bonds, designed to spread the risk across several investments so there’s a greater likelihood of positive returns.
As such, the same rules described above apply to investing in mutual funds and how doing so affects your credit.
The key point to remember is that investing wisely in stocks, bonds, and mutual funds will not do significant damage to your credit if you don’t go into debt to cover the investments. “Only invest what you can afford to lose” are, and always will be, smart words to live by. And, if you need to choose between investing your money or paying your current bills on time, you should focus on making timely payments and, if necessary, paying down expensive debt before buying stocks or bonds.
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