Does Starting an IRA Affect Your Credit?
An individual retirement account provides you with a means of planning for your retirement even if you don't have access to an employer's pension plan or a lucrative career. An IRA isn't an extension of credit, but the account can have varying effects on your credit, depending on how you manage your money and pay your existing debts.
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Effect on Annual Income
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Opening an IRA allows you to reduce your annual income for tax purposes by the amount of money you divert to the account. Reducing your income in this manner lowers your tax liability, but it can also lower your ability to secure credit. This happens if you divert the maximum allowable amount of income to your IRA and already have a low annual salary. Creditors looking at your annual income to determine your ability to pay future debts might be hesitant to lend you money if your annual income is low. At time of publication, the maximum yearly donation to an IRA account is the smaller of $5,000 or your total taxable income, according to the IRS.
Status of Investments
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Creditors also examine the health of your investments, including an IRA, when determining whether to extend you a loan. This might not happen for smaller extensions of credit, including a credit card, but it can occur with a large home loan or purchase of real property. A lender creating a home mortgage or business loan to purchase property usually monitors your credit continually throughout the buying process, so much so that any negative fluctuation in your credit could cause the lender to become hesitant about the deal and withdraw the offer.
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Effect on Credit Report
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An IRA does not show up on your credit report like a credit card or a personal loan. In terms of your credit score, opening an IRA should have no measurable effect on your total score in the positive or negative. While the account doesn't create a notation on your credit report, it can still affect your ability to secure new loans and lines of credit. Your IRA shouldn't affect your credit score even if you allow the account to sit idle and stop making donations.
Paying Existing Debts
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Devoting money to your IRA helps you when you retire, but it could also hurt your ability to pay current debts if you deposit too much money. Responsible use of your available cash is necessary to continue to pay your bills on time while still devoting spare cash to your retirement down the road. Failing to use your money responsibly could result in damage to your credit score from missed debt payments. Once reported, negative notations on your credit report can remain for up to seven years.
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