When it comes to anything financial, it is understandable that people are concerned about whether using a new service or technology will affect their credit score. In this article, we discuss the role of Open Banking within the finance sector and whether Open Banking affects your credit score.
It is important to begin by saying that banking itself does not directly affect your credit score. Open Banking is part of this sector and therefore does not have a direct negative impact on your credit score if you start to use it, so there is no concern about embracing Open Banking and reaping the benefits it offers.
Open Banking refers to the practice of sharing financial information securely and with consent between banks and other approved financial institutions through application programming interfaces (APIs). It provides consumers with greater control and access to their financial data, allowing them to share their data with authorised third-party providers.
Open Banking Can Influence Your Credit Score
Whilst Open Banking does not directly negatively affect your credit score, it can directly influence it through the services and products offered by third-party providers. For example, some FinTech companies use Open Banking data to offer personalised financial management tools, budgeting apps, or lending services. If you use these services and they report your repayment behaviour to credit bureaus, it may influence your credit score.
How Open Banking Can Give You More Control
The great news about Open Banking is that it grants the user more control over their personal finances and as a result, has more control and transparency over their credit rating which can only be a good thing.
Traditionally, financial records for customers have been set within the banks and financial products were mainly being provided by the key players in the banking world. What Open Banking has done is allow access to this information to third-parties with explicit permission which, in turn, has allowed innovative new players to enter the market and provide more competition.
Using technology and new innovative features, these companies are putting customers in control of their financial information like never before.
What Are The Main Factors That Affect Your Credit Score?
Every company may consider different information when calculating your credit score and use different formulas, so there is no definitive list of factors that affect your credit score. Whilst there are different formulas, there are some key factors that affect your credit score and certain techniques and things you can do to impact your credit score positively. These include:
- Only borrowing what you can afford – whilst you can buy things on credit, ensure you can meet the minimum repayments comfortably
- Consider direct debits – to help keep on top of credit payments, consider setting up a regular payment to pay off your credit cards as it highlights that you are in control of your finances
- Set agreed credit limits to keep borrowing as low as you can
- Try and keep accounts for a long time – whilst you can set up new accounts, the age of your credit accounts can be taken into consideration as it shows how well these accounts are managed
There are also some things you should avoid doing to help keep your credit rating as good as possible. – such as setting up new accounts. Whilst showing you can manage accounts over a period of time is positive and setting up new accounts can also show you are in good control of your finances, try not to open new accounts too regularly as each time you do, it temporarily lowers your credit score.
- Avoid being too close to your credit limit – staying comfortably within your limit is the best strategy otherwise lenders can assume you are over-reliant on credit
- Don’t miss payments – missing payments regularly can end up significantly lowering your credit score for several years
- Having no credit history – whilst some people don’t like the idea of buying things on credit, they can be negatively impacting their credit score for when they do need to lend money as there is no evidence or track record of sensible borrowing
In general, any financial activity that involves borrowing, lending, or repaying money has the potential to affect your credit score. This includes activities facilitated through Open Banking, such as applying for loans or credit cards with the help of third-party providers, but not Open Banking itself. It’s important to note that credit scores are determined by various factors, including payment history, credit utilisation, length of credit history, types of credit and new credit inquiries.
If you’re concerned about how Open Banking or any specific service may impact your credit score, it’s advisable to review the terms and conditions, privacy policies, and data-sharing practices of the service provider. Additionally, monitoring your credit report regularly and practicing responsible financial habits are crucial for maintaining a healthy credit score.