Most people don’t realize that banks can close your account without warning or notice. There are several reasons they do this, and most of them are avoidable.
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. However, it could refer to a 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 Was 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 is useless to them. You may receive letters requesting that you reactivate an inactive account. If you don’t, they will close it within a given timeframe.
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, such as a minimum balance requirement or a monthly transaction limit. If you don’t follow the rules one too many times, they may close your account.
The most common reason for a closed bank account 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
A bank may close your checking account if you constantly write bad checks or go over your debit card balance. 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.
The bank will close your account immediately if they suspect you opened it in someone else’s name or are participating in illegal activity. 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 is in good standing, they may offer to transition you to a 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 adding money to your checking or savings account if you have 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 have no choice but to accept it.
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, the bank will keep what you owe them from your direct deposit before sending it back.
If you have expenses deducted automatically from your bank account, paying them late could incur late fees and other penalties. Immediately notify any creditors of the change. If you don’t have another bank account you can provide them, look for other payment options, so you can 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.
Overdrawing your checking account for too long will result in excessive fees. The bank will most likely send your account to a collection agency. This will negatively impact your credit report and your ChexSystems report (banking report).
Your ChexSystems report shows bounced checks, overdrafts, and other bank transactions related to your banking habits. This makes it much harder to open 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 dispute items on your report by writing ChexSystems a letter. By doing so, you may be able to get the negative item removed. This would allow you to get out of their system and have more options for opening a new bank account.
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 other abuse, you may have difficulties opening a new bank account.
If the bank closed your account because they changed their guidelines or their structure, you might not have trouble.
If you’ve had past banking issues, there are plenty of online banks and credit unions that offer second chance checking accounts. You may have fewer privileges or pay more fees with these accounts. However, they give you a chance to establish better banking habits so you can open a regular account in the future. You can also look into banks that don’t use ChexSystems.
Ways to Prevent a Bank From Closing Your Account
A closed bank account remains visible on your ChexSystems report for up to five years.
Sometimes, it’s difficult to prevent a bank from closing your account. However, 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 fees accumulate, and the more likely the bank is to close your account.
If you keep a negative balance, banks have no reason to keep your account open. They are likely to close it and report you to ChexSystems and the credit bureaus.
A closed bank account can haunt you for a long. Even a minor offense 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. Despite the bank’s decision, there are still steps you can take.
If you have a closed bank account, make sure it’s for a reason that won’t hurt you in the future. If you have outstanding fees, or you abused your account, find ways to make it right.