Does Using Your Margin Account Hurt Your Credit?

A margin account provides you with a way to borrow money against the value of the investments in your portfolio. Since most loans require some sort of credit approval, it's natural to think that using a margin account can have an effect on your credit. However, in most cases, this isn't true. A margin account only affects your credit if your collateral, in the form of your investments, vanishes and you can't repay your loan.

In some sense, a margin account is more like a secured loan than a traditional loan. Firms won't just give you money and hope you pay it back. To borrow money from a margin account, you must first deposit an amount greater than you intend to borrow. If you can't pay back the loan, the assets in your account can cover it for you. Since you have assets on account, a firm will not report your margin account to the credit reporting agencies. Margin loans, therefore, don't appear as open accounts on your credit report.

One of the ways firms reduce their risk when issuing margin accounts is by using margin requirements. The Financial Industry Regulatory Authority helps by regulating minimum standards for how much positive value a client must keep in his margin account. For example, when you open a margin account, you must keep a "margin" of 50 percent equity in your account — hence the term, "margin account."

Having 50 percent equity means that if you want to borrow $5,000, you must have at least $10,000 in value in your account. As time goes on, you must maintain a minimum 25-percent equity in your account at all times, known as the "maintenance margin." Some firms require an even higher level of maintenance margin.

If your investments fall in value, the net positive equity in your account falls as well. The danger of a margin account is that the positive equity in your account will fall below the maintenance margin value established by either FINRA or your firm. In this case, you would be issued a margin call.

A margin call requires you to deposit additional money or securities into your account immediately. If you don't, the firm can sell your collateral to pay off the loan, a process known as liquidation. A margin call won't hurt your credit because you will ultimately end up making a timely payment, either through depositing money or liquidation.

Your credit score consists of five components, most of which a margin account does not affect at all. Since a margin account is not reported to the credit agencies, it doesn't affect four of the five components of your credit score, namely your amount owed, length of credit history, new credit and type of credit used. However, if your account value drops to the point where even liquidation will not pay back your margin loan, you are personally on the hook to make good. Failure to pay back your outstanding margin loan will affect your credit payment history, which is the largest component of your overall credit score.