Does Cryptocurrency Factor Into Your Credit Score?
Cryptocurrency is a buzzy concept that’s enjoying the spotlight these days, thanks to trailblazers like bitcoin. This type of electronic cash may have paved the way, but it certainly doesn’t stand alone. Alternative currencies like Litecoin and Zcash are carving out spaces of their own in the cryptocurrency world, giving consumers more payment options than ever before.
But what exactly is cryptocurrency? And, more importantly, do transactions have any impact on your credit score? The short answer is cryptocurrency transactions won’t directly impact your score. Let’s dive in and demystify the ins and outs of crypto purchases.
- What is cryptocurrency?
- Cryptocurrency and your credit score
- The lowdown on cryptocurrency and credit
What is cryptocurrency?
Cryptocurrency is essentially virtual “money” that isn’t regulated by any third-party agencies or institutions. As such, it’s pretty volatile by nature. The price of bitcoin has a history of swinging wildly. At one point it spiked to nearly $20,000, but one bitcoin was equal to nearly $3,850 as of March 6, 2019.
But Spencer Bogart, general partner at Blockchain Capital, said it isn’t really currency in the way that people traditionally think about it.
“I think the state of bitcoin today is much closer to property or a commodity, so it’s just digital property,” he said. “Digital gold might be a good way of putting it.”
Consumers can buy bitcoin and use it to make purchases from merchants who accept it as payment. It can also be used to move money from one party to another, not unlike a wire transfer. The big difference is that unlike a wire transfer, it’s a much faster, direct transaction that doesn’t get tied up in any third-party intermediaries. Others buy up cryptocurrency and hold it as an investment.
Another term you’ve probably heard is “blockchain.” This is simply the technology that enables cryptocurrency to exist.
Cryptocurrency and your credit score
Cryptocurrency transactions don’t directly affect your credit rating. Your credit report is a reflection of your financing history — a record of student loans, auto loans, mortgages, credit cards, personal loans and the like. Think of it as a snapshot of all the money you’ve borrowed from different lenders and how you’ve managed it over time. It highlights your outstanding balances along with your credit history to help churn out that ever-important three-digit credit score.
The thing about cryptocurrency is that you’re not financing it. You buy bitcoin outright, so the transaction never finds its way to your credit score. The only exception Bogart could think of was if you take out a loan to purchase bitcoin, in which case that loan will end up factoring into your credit score. So, how do you buy bitcoin or other popular cryptocurrencies?
“I’d say the smoothest experience is to use a third-party app that will help you do it,” said Bogart. “They essentially hold your bitcoin for you, and then when you tell them to send it somewhere, they’ll send it for you.”
Consumers can make purchases through digital currency exchanges like Coinbase or Coinmama. Both user-friendly platforms accept credit cards. Coinbase even utilizes an app that allows for smartphone transactions. Just keep in mind that each tacks on fees that could fluctuate.
Credit card transactions are structured differently. Whenever you swipe a credit card, you’re basically borrowing that money from the credit card issuer. The amount owed is added to your outstanding balance, and you’re charged a typically high interest rate if you don’t pay that balance off in full at the end of each billing cycle. Your payment history and amount owed are reported to the credit bureaus, which directly affects your credit score.
The lowdown on cryptocurrency and credit
Bogart doesn’t generally encourage people to rush out and invest 100% in a bunch of bitcoin. Cryptocurrency is still young, and it’s a highly volatile asset. But he does recognize its potential long-term value. As far as your credit rating is concerned, don’t fret. Crypto transactions pose no direct threat to your credit score — but there is an indirect threat.
If you use a credit card to purchase cryptocurrency, those purchases will affect your score, so tread carefully. Like any other type of shopping, consumers are wise to use credit in a way that boosts their score — not tanks it. This means not exceeding 30% of your available credit and making steady, on-time payments.