Most people don’t realize that banks can close your account. Just as you can choose to open a bank account (upon approval), banks can choose to close your account. They don’t do it just to be mean, though. They always have reasons.
There are generally no adverse implications for a customer who closes an account. The most obvious exception is when you close a credit card account. When this happens, it could cause the customer to experience a short-term drop in their credit score.
A closed account is any account that has been deactivated or otherwise terminated, either by the customer, custodian, or counterparty. The term is often applied to a checking or savings account, or derivative trading, credit card, auto loan, or brokerage account.
Knowing why the bank has closed your account and what you can do about it is crucial. We discuss that below, along with the five things you must do next and how to prevent it from happening again.
Reasons Your Bank Account Closed
Banks can close bank accounts for any reason; they aren’t obligated to keep your account open. But, here are some of the most common reasons that a bank will close a bank account.
You Don’t Have A Balance
If you have a zero balance for too long, the bank may consider your account dormant and close it. Banks are for-profit, and an account with no money in it doesn’t help them. They may send you letters requesting that you activate the account, or they will close it within a certain number of days.
Most banks will even charge you a fee if you have a negative balance. If you don’t pay the fees, it’s yet another reason for them to close your account. Only this time, they’ll also send your dormant account to a collection agency to collect the funds.
You Didn’t Follow The Rules
Every bank account has rules, whether it’s a minimum balance requirement or a maximum number of transactions you can make per month. If you don’t follow the rules one too many times, they may close your account.
The most common reason to find out your account is closed is because you made too many transfers. Savings accounts allow a maximum of 6 transfers a month. If you consistently exceed this number, they may close your account.
Too Many Overdrafts Or Bounced Checks
If your checking account is constantly overdrawn, either by writing bad checks or by using your debit card for more than the balance in your account, a bank may close your account. They usually excuse a couple of overdrafts or bounced checks if they aren’t frequent. However, if you have too many, and they may consider you high risk and close your checking account.
If the bank suspects you opened an account that doesn’t belong to you, or they worry that you are participating in any illegal activity, they will close the account immediately. There often isn’t any warning in this situation because of the legal consequences it can cause.
The Bank Changed Structure
If you’ve been with the same bank for a long time, you may notice a restructuring. They often eliminate certain types of accounts and open new ones. If you have an ‘old account’ that has been closed, but your account has a good standing, they may offer you the opportunity to transition to the new account.
Before you agree, read the fine print. Make sure there aren’t any fees you’ll have to pay or that you can meet the minimum balance requirements. Don’t assume the account will be the same—look out for yourself.
What to Do if the Bank Closes Your Account
If you’re dealing with a closed bank account, there are the five steps you must take to move forward.
1. Find Out The Reasons
Banks aren’t obligated to tell you why they closed your account, but it doesn’t hurt to ask. What if the reason is something you can fix?
Sometimes it’s as simple as updating your record or putting money in your checking or savings account if you’ve been carrying a zero balance. If you still want the account, ask the bank supervisor how you can fix the situation.
If your bank doesn’t tell you why they’re closing your account, you may not have a choice but to accept that the account is closed.
2. Stop Direct Deposits Or Automatic Bill Payments
If you’ve automated your income or expenses, you’ll need to stop it immediately. It can take a few weeks to get another paycheck if you wait to tell HR about the account closure. To make matters worse, if you owe the bank any money, they’ll keep what you owe them from your direct deposit before sending it back.
If you have expenses automatically coming out of your bank account, you could end up with late fees and other penalties for not paying your bills on time. Immediately notify any creditors of the change. If you don’t have another bank account to supply them with, find out your other payment options, so you get your payments in on time.
3. Check For Outstanding Overdrafts
If you wrote checks that didn’t clear, you must clear them up fast. Here’s why.
If you leave a checking account over drafted for too long, you’ll not only accumulate excessive overdraft fees, but the bank will most likely send your account to a collection agency. This hurts not only your ChexSystems report (banking report) but your credit report too.
The ChexSystems report pertains only to your banking habits, and if you have bounced checks or overdrafts, they’ll show up on your report. This makes it much harder to get a new bank account in the future.
Your credit report shows how you use your credit, but it also includes collection accounts. If the bank sells your account to a collection agency, it hurts you in two ways. You may not be able to get a bank account, and future creditors may not approve your applications either.
4. Get a Copy Of Your ChexSystems Report
If your bank wouldn’t give you a reason why they closed your account, pull your ChexSystems report. Everyone gets one free report annually, so take advantage of that and find out what happened.
You’ll see what banks have said about you and what information they shared with others on this report. If you find any information that is unfair or inaccurate, you are entitled to dispute it. You can send a letter to both your lender and to the credit reporting agency; the Consumer Financial Protection Bureau provides sample letters to help.
Make sure you have enough proof of why the information is incorrect, and you may be able to get it reversed so you can get a new bank account somewhere else.
5. Evaluate Your Options For A New Account
With your account closed, you may wonder what’s next. If a bank closed your account, is it impossible to get another account?
Why was your account closed? Asking a bank representative or pulling your ChexSystems report should tell you why. If it’s something like excessive overdrafts/bounced checks, or you abused your account, it may be hard to get a ‘regular’ bank account.
If the bank closed your account because they changed their guidelines or their structure, you might not have trouble.
If you had issues, though, look at credit unions or look for a second chance checking account. You may have fewer privileges and/or pay more fees, but it will give you a chance to establish better banking habits so you can open a regular account in the future.
Ways To Prevent A Bank From Closing Your Account
Closed accounts remain visible on your credit report for 7 to 10 years, depending on whether they were in poor or good standing when closed.
Sometimes, it’s difficult to prevent a bank from closing your account, but you can reduce the risk with a few simple steps.
Don’t Bounce Checks Or Overdraft
Banks aren’t in the business of covering overdrafts and bounced checks. They are in for profits. Try keeping your spending within what you have, and you won’t risk getting your account closed. Show responsible use of your account, and you don’t have anything to worry about.
Follow The Rules
All bank accounts have rules. Follow them. Don’t make more withdrawals than is allowed for the month, keep the minimum required balance, and follow any other bank rules. If you follow the rules, the bank doesn’t have a reason to cancel your account.
Pay Your Fees
Always pay your fees. If you accidentally overdraft or bounce a check, make it right immediately. Don’t wait. The longer you wait, the more the fees accumulate, and the more likely it is that the bank will close your account.
If you keep a negative or zero balance, banks have no reason to keep your account open and are likely to close it and report you to the reporting agencies, which may include the credit bureaus.
Because closed accounts remain on your credit report for so long, that seemingly minor detail can take on a greater significance if it’s not approached thoughtfully. Credit reports and credit scores play a big role in your ability to borrow money affordably. Insurance companies, landlords, and even potential employers often consult them as well.
However, if your bank account is closed, it’s not the end of the world. There are steps you can take, even if you can’t change the bank’s mind. Sometimes you can get them not to close your account if it was a clerical error or something you need to update.
If you have a close account, make sure it’s for a reason that isn’t going to hurt you in the future. If you have outstanding fees, or you abused your account, find ways to make it right.
Meanwhile, you may need to open a second chance checking account of find a bank that doesn’t use ChexSystems. You may even want to consider using a prepaid card until more time passes between your closed account and an application for a new account.