The number of people investing in the stock market has been continuously growing over the years. The facility involves buying and selling of corporates’ ownership stakes.
If you are a stock investor or if you are planning to venture into the stock business, you would want to know what’s at stake when joining this market. Particularly, you want to know how stock investments affect your credit.
First off, stock investments are not among the five factors constituting your credit score. However, the investment plays a significant role in determining your credit score and your creditworthiness through:
- The debt of a margin account may be sold to collection agencies.
- Unwise stock investments may drive you to get a new credit line.
How Stock Investment Bring About Hard Inquiries
Stock investment is a rampantly growing business area, in both amounts invested and the number of investors. This is due to the profits accrued through dividends and the selling of stock shares after value appreciation.
Some stock markets allow direct market participation while others demand the use of a broker. A broker will not be compelled to enquire about your credit score while opening an account, unless you chose to open a margin account.
This is a stock investment account whose stock purchase depends on credit from a security firm. The credit enquiry will feature in your credit report as a hard enquiry and hence lessen your credit score- up to 5 points.
That said, a single hard enquiry doesn’t have an adverse effect on your score but once you open several margin accounts with several credit checks, the summation of the individual hard enquiry credit score dings will have a significant impact on your score.
How Selling of Debt to Collectors Harm Your Credit Score
The effect hard enquiries have on the credit score is often small and short-lived. Some companies may also be lenient and may not perform a credit check before allowing you to start a margin account with them.
However, they may set a minimum margin requirement of funds that you should have as an investment to act as a form of security to minimise the chance of having an unpaid debt.
Once your balance runs below this minimum amount, you are required to sell stock or make deposits to help raise your balance.
For example, if you have $2,100 worth of investment in a margin account with a minimum requirement of $2,000. Making a $600 loss would compel you to add $500 to keep you within the minimum requirements.
However, in the extreme situation that you cannot offset the credit owed in the marginal account, the company may opt for debt collectors to seek their losses.
The event will be updated in your credit report, ending up causing much more significant harm to your credit score in the long run.
How Unadvised Stock Investments May Lessen Your Credit Score
Stock investments, like all other investments, require keen risk assessment before indulging fully because of the unpredictability of the markets.
For this, you need to keep a standby fund, in the bank, to act as a financial cushion in case of losses or in case an urgent need arises when the stock is low.
In the case that you venture into these markets without making these considerations, a loss may force you into seeking for a loan to keep up with your financial obligation.
The danger lies in the fact that new credit and the amount of credit owed are essential factors when calculating credit scores, taking 10% and 35% respectively.
Stock investment doesn’t cause a significant increase or decrease in your credit score. This is because investments are not regarded as financial irresponsibility. Involvement or disengagement should hence have no significant effect on your credit.
However, the investments may indirectly affect your creditworthiness in the above-mentioned ways.
To salvage yourself from lowering your credit score, you need to make timely payments for debts and make informed investment decisions that would increase your income streams and lessen the chances of borrowing.
This will help you maintain a strong credit score and save you money that would go to repaying interest.