Since our credit scores are tied so heavily to our finances, you might be wondering if it's essential to use a checking account at a bank or credit union to have a good credit score. This is a good question, especially if you handle most of your financial obligations using prepaid debit cards and money orders.
The short answer here is no, according to Jeff Richardson, a spokesperson for VantageScore Solutions.
"It's probably a little bit harder to get credit initially and maintain it, but you can build good credit without a checking or savings account as long as you use those credit products responsibly."
That said, here are some ways that not having a checking account could be making things a bit more difficult for you to build good credit or secure a loan.
1. It's Harder to Pay Your Bills on Time
Having a strong payment history is the largest determining factor of your credit scores — in fact, it makes up 35% of your scores. No matter what bill you're paying, it can get difficult to do so on time when you have to pay each bill separately by phone or online — or worse, run around town getting money orders instead of simply writing a check or using the automatic bill pay function from a checking account.
"Using automatic bill pay from your checking account benefits your credit to the extent that your payments will be made on time every month and you're less likely to forget one," Richardson said.
He said the VantageScore model now incorporates any rent, utilities and telecom payments when they're reported to any of the three main credit bureaus — TransUnion, Equifax and Experian — so on-time payments of these regularly monthly bills is becoming more important to your credit scores. (Note: Not all providers or landlords report your payments to the bureaus, so it may be worth checking with them to see what your specific situation entails.)
In addition, many monthly services (notoriously health, auto and life insurance companies, but it varies) don't accept debit cards or phone payments and can ask for an automatic bank draft to set up an account.
2. No History to Review
Often times, banks are more inclined to work with you on a loan or line of credit when they have a history with you, as they already have some insight into your financial behaviors.
"Becoming part of the financial system prior to applying for credit means you're likelier to get better terms such as a higher credit limit, a lower interest rate or more rewards because you've shown a capacity to participate in the banking world," Richardson said.
Richardson stressed if you're going to be needing an auto loan or mortgage in the near future, to think about establishing a relationship with a local bank or credit union several months in advance. While doing so won't guarantee your approval, it certainly can help.
3. You Can Fall Prey to Predatory Lending Debt Traps
It can be a bigger challenge to spot reputable loans or credit products when they are offered outside of the traditional financial system.
"While you can still get some credit cards and many loan products without belonging to a bank, we recommend having a relationship with a bank or credit union in order to avoid more expensive and predatory options," Thomas Nitzsche, spokesperson for ClearPoint Credit Counseling, said in an email. This can include some check-cashing stores, payday lenders and title loans, as they can potentially get you in debt trouble if not used properly. Remember, it's always a good idea to vet any financial institution — traditional or otherwise — before doing business with them.
Keeping an Eye on Your Credit
Whether you are a loyal bank or credit union customer or completely unbanked, it's a good idea to know where your credit stands, especially if you plan to take out a loan or get a new credit card any time soon. You can access copies of your credit reports from the three major credit bureaus for free every 12 months by going to AnnualCreditReport.com. You can also see two of your credit scores, updated every 14 days, for free on Credit.com.