Whether you’re just starting out on your investment journey or you’re a sophisticated and mature finance expert, there are three basic principles that most industry professionals will maintain are key to long-term financial success. First, it’s important to make a budget as early as possible, then determine to stick to it. Second, you should monitor your credit score carefully and try to keep it as high as possible. Last, it’s important to keep an eye on the future and invest smartly and strategically.

Yet, what do you do if your investment pursuits cause your credit score to drop? How can you work fervently toward one goal, even if it means sacrificing another? This could be a reality if you invest in stocks and bonds that ebb and flow in their market performance. While in the long run, they may be smart investments, your losses affect your credit score in the short-term. To that end, let’s discuss a few of the most common investment avenues and the difference they may play in your score.

Stocks

In short, investing in the stock market means buying shares in companies that trade publicly, then earning a dividend based on how that company performs. If you choose to invest in the stock market, you do so understanding that it fluctuates. That’s why assessing the level of risk that you’re comfortable taking on is an important first step when designing your portfolio.

While traditionally, you would work through a brokerage firm to initiate your investments, these days it’s often as simple as hopping online and creating an account to trade stocks. Even if you decide to go the electronic route, the firm you work through will still run a report on your credit before moving forward with the process.

This is done to ensure your identity. It also helps the firm to verify that you are dependable with your finances and are a trustworthy trader. However, keep in mind that this check into your credit score is known as a hard inquiry, which could lower your score by a few points. That’s why it’s important to be strategic with the firms you sign up with. Keep it as minimal as possible, as several hard inquiries could significantly affect your credit score overall. However, the very tool that could lead to this issue -- the internet -- could also help you turn the situation around. Today, there are many reputable online companies offering credit repair services in conjunction with the major reporting bureaus, so you can take proactive steps to reverse any damage done.

Yet, if you work in person with a brokerage firm, this step is usually unnecessary, and a hard inquiry into your credit score is avoidable. The only exception? If you borrow money from the firm to trade stocks, which is known as opening a margin account, they will have to perform the investigation to determine your financial responsibility.

Bonds and Mutual Funds

When you invest in the stock market, you are buying shares that will either appreciate or depreciate depending on that specific company’s performance. By its very nature, that process can be risky and full of ups and downs. On the other hand, bonds are usually considered to be a more risk-averse route, as, instead of buying shares in a company, you’re essentially loaning your money to the government, with the notion that once the bond has reached maturity, that money will be returned to you, along with the interest it has accrued.

If you have an excess of both time and patience and don’t need to access your money until years or even decades down the road, bonds can be an excellent investment option, as the longer they sit, the more interest they earn and the greater the overall payout. This is the reason why many people used to give bonds as newborn baby gifts, as they can mature and grow alongside the child. The process of investing in a bond solution is akin to investing in the stock market, though there are marked differences that can affect your financial stability.

For the most part, investing in bonds will not negatively affect your credit score. The only reason a credit check might even be run against you would be for a party to verify your identity, but in this case, it would be a soft inquiry as opposed to a hard one. A soft inquiry is usually conducted as part of a background check and isn’t performed as a part of a lending decision. These won’t cause your score to lower.

A similar situation is present with mutual funds. A blend of both stocks and bonds, mutual funds are designed to spread your level of risk around so you aren’t affected too much by the fluctuations in the market. Thus, depending on who you work with and whether stocks or bonds are in question, your credit score could be negatively impacted if a hard credit check is required to verify your lending credibility. If an identification verification is all that is required, a soft inquiry will not do any damage.

Overall, it’s important to remember that investing in the stock market, bonds or mutual funds can be a valuable and viable part of saving for your future. If performed smartly and in accordance with an expert, these pursuits should not negatively affect your credit score. However, if you find yourself going into debt to fund your investments or signing up for multiple online stock trading accounts, with each one requiring a hard inquiry, you could see that number drop. If this is the case, focus first on paying down any existing debts, sticking to your budget and making sure all of your bills are taken care of on time. Then, you should be in a healthier financial state and better able to pursue new investments with confidence.