Does opening an ISA affect credit rating?

With interest rates soaring in 2023, you might be considering opening an ISA (Individual Savings Account). But does it have any impact on your credit score? Loqbox has your back with some advice on what is an ISA, what are the best ISA benefits you should know about, and do ISAs show on your credit report? Let’s get into it.

What is an ISA?

Short for ‘individual savings account’, an ISA is basically just a tax-efficient savings account. It allows you to save or invest your money without paying tax on the interest you earn. 

That means you could potentially get your hands on a lot of tax-free income over time. There are four types of ISAs: cash ISAs, stocks and shares ISAs, innovative finance ISAs, and Lifetime ISAs (LISA).

You can also open a Junior ISA for someone who is under 18 years old. And if you have a close friend or relative who’s unable to open one for themselves, you can help them apply with you acting under a financial deputyship.

What is the benefit of an ISA?

One of the most important ISA benefits is the advantage you get on tax. 

Using an ISA lets you maximise the growth potential of your savings or investments without the burden of tax deductions eating into your returns, or having to declare your interest on a tax return (up to a point).

ISAs provide a flexible way for you to save money for short-term goals or long-term investments, depending on your financial needs.

Does opening an ISA affect credit ratings?

No, opening ISAs generally has no impact on your credit rating. Unlike credit products such as loans, mortgages, and credit cards — ISAs are not considered to be ‘borrowing’ so they aren’t reported as evidence of you ‘using credit’. 

But do ISA’s show on your credit report? No, they don’t get linked to your creditworthiness in any way. When you open an ISA it won’t directly affect your credit score positively or negatively.

When you open any savings account the provider will often run what is known as a credit check on you. Generally this is just so that they can make sure that you are who you say you are. Soft credit checks don’t leave any flags on your credit report, hard credit checks do. You can find out more about hard vs soft credit checks here. 

Lenders do consider your overall affordability when you apply for their financial products though, so having plenty of savings in your ISA could benefit you in that way. 

How many ISAs can I have?

You can have multiple ISAs, but there are restrictions on how much you can contribute each tax year. The ISA allowance (2023/24 tax year) is £20,000 per person. Running from April 6th to April 5th the following year.

That £20,000 allowance is spread across all of your ISAs. But it's important to note that you can only open and contribute to one cash ISA and one stocks and shares ISA each tax year.

How much can you put in an ISA?

As mentioned above, the ISA allowance (2023/24 tax year) is £20,000 per person.

This amount is the maximum you can contribute to all of your ISAs in a single tax year. But remember that any unused allowance does not carry over to the next tax year, so it's a good idea to use as much of your allowance as you can.

What is a Lifetime ISA?

A Lifetime ISA (LISA) is a special type of ISA designed to help people save for long-term goals, like their first home or saving for retirement.

‍If you're aged between 18 and 39, you can open a Lifetime ISA and contribute up to £4,000 per tax year, as mentioned above. The brilliant bonus of this is that the government provides a 25% bonus on top of your contributions, meaning you could receive up to £1,000 extra each year.

This is a huge help for people saving for the deposit for their first home (be mindful that there is a cap on the value of the property you want to purchase of £450,000 when you purchase using this government bonus ISA). And the compound interest of long-term savings for retirement is highly desirable (you can contribute up until you’re 50 years old, as long as you make your first savings payment by 40 years old).

Contributions towards your LISA are included in your total allowance of up to £20,000 (but you may only deposit £4,000 a year into this type of ISA) so you would spread the remaining £16,000 of your savings allowance in that tax year into the different types of ISAs (Cash ISA, Stocks and Shares ISA or Innovative Finance ISA). 

There are also restrictions on your LISA for when you can take out your money. After 12 months from your first contribution, you can withdraw to buy a house of up to £450k value. Any other withdrawals before the age of 60 can incur a 25% government withdrawal charge (unless you’re faced with a terminal illness).

Can savings (positively) affect my credit score?

Not traditionally, but with Loqbox it can Grow your savings, and build your credit score, as you go! ‍

Get started with Loqbox — set your savings goal (between £20 and £200) and we’ll lock that away as a 0% APR loan. Make your savings contributions each month for a year, and we report your payments to the UK’s top credit reference agencies: Experian, Equifax, and TransUnion. Our members report a credit score increase of up to 145 points in the first year!

Improvements to your credit score are not guaranteed.