Have you found a better bank account than what you currently have? Or maybe you are dissatisfied with the customer service of your current bank. Or perhaps you’re moving to a different state where your bank has no branches. Regardless of why you want to close a bank account, it’s important to know how it may affect you financially.
Your credit score determines several things in your personal and financial life, including getting a credit card, buying a house or car, renting an apartment, and much more. You should avoid doing anything that would impact it negatively.
So, does closing a bank account hurt your credit? Are there any risks associated with closing a bank account? Read on to learn more.
How Closing a Bank Account Affects Your Credit Score
Unlike credit card accounts which are regularly reported to the three major credit bureaus and factor into your credit score, closing a bank account, generally won’t hurt your credit score. Closing a checking or savings account has no direct impact on your credit. You are free to open a new bank account within the same institution or switch to a new bank account at a different bank or credit union.
A bank may check your credit reports and scores when opening an account. However, they can’t report your bank activity to Equifax, Experian, or TransUnion — the three major credit bureaus. This means that your daily transactions, bank deposits, and withdrawals neither help nor hurt your credit.
Your credit score is based on the information found on your credit reports. It includes things like how you manage your debt payments, the amount of money borrowed, and the number of credit inquiries you’ve made. However, there’s no direct link between your checking, savings, or money market accounts and your credit scores.
Other Factors That Can Hurt Your Credit
While closing an account doesn’t affect your credit, several other factors can lower your credit significantly, thus impacting your financial health. They include:
- Making late or missing payments
- Increased debt load
- Errors on your credit report
- Credit utilization ratio – refers to the amount owed divided by your credit limit, usually expressed as a percentage. To maintain good credit, ensure you keep your credit utilization ratio below 30%
When Closing a Bank Account Can Hurt Your Credit
Where you could be in trouble, however, is if your account has been left with an outstanding balance, such as an overdraft fee that you never paid. Closing an overdrafted bank account can negatively impact your credit. Banks or credit unions can send your account to a collection agency if the balance remains outstanding for an extended period.
A collection agency is designed to collect money from customers on behalf of businesses that have been unsuccessful in collecting debts. The agency may report the collection account to the credit bureaus, which can significantly impact your credit score.
The reported collection account will be factored into your credit score, which can result in a severe drop in your credit score. According to Experian, “Collections fall under payment history, which is the biggest factor in your FICO Score calculation, driving 35% of your score.”
This means the collection account, whether settled or not, will remain on your credit report for seven years. Fortunately, their impact on your credit score lessens over time. You should regularly check your credit report to ensure it doesn’t include any outdated information that could drag your credit score down.
Additionally, a closed bank account that’s been overdraft can be reported to ChexSystems. ChexSystems is a consumer reporting agency for financial institutions. A ChexSystems report is similar to a credit report but only lists your current and past negative banking activities.
ChexSystems gathers information about problems you’ve had with checking accounts. ChexSystems reports include account misuse, fraudulent activity, too many accounts, negative balances, and more.
Any negative reports, including uncleared overdrafts, made to the ChexSystems remain in the system for up to five years. Whether you or the bank terminated the account, leaving it with a negative balance can make it difficult for you to open another bank account later.
See also: 20 Checking Accounts for Bad Credit
How to Close a Bank Account Properly
Contact the bank or credit union if you want to close your bank account without any negative effects on your credit. Make sure that you clear any outstanding balances or pending transactions that could bring down your credit.
Some people make the mistake of assuming that their old account is out of sight simply because they have already shifted to a new bank. To prevent your credit score from dropping, ensure you clear any outstanding checks, pending transactions, and auto drafts.
If you wrote someone a check recently, wait for the transaction to be completed before closing the account to ensure your bank balance stays positive. Also make sure that you opt out of any subscriptions or streaming services that are charged to your account every month.
If you are moving to a different bank, you can leave some money in your old bank account when switching your deposits and transactions to your new bank account. You can leave the account open for a few weeks to cater to any unsettled transactions.
Once you have confirmed there are no pending balances, online bill payments, checks, or overdrafts from your closed account, transfer the funds to your new account and close the old one. In a situation when you close your account with an outstanding negative balance, make it a priority to clear it as quickly as possible.
The Consumer Financial Protection Bureau will also help ensure that financial institutions don’t harass you. The Consumer Financial Protection Bureau makes effective, consistent, and fair rules that empower you to take better control of your finances and economic life.
Closing your bank accounts will not affect your credit. However, when you close a bank account, it must be in good standing—or you might be looking at a credit score ding. While some people believe closing an account will impact their credit, your bank account activity, including deposits, withdrawals, and checking, are not included in your credit report.
Your credit file contains public records and credit accounts that involve debt, including tax liens, collections accounts, and bankruptcies. Therefore, they neither have a positive nor negative influence on your credit.
However, the situation is different if you have pending balances or overdrafts in your checking account when you close your account. In that case, the bank or credit union can turn it over to a collection agency that can report you to any top credit bureaus.
A reported collection account shows up as a delinquent account on your credit report, which can negatively impact your credit score. Be sure to clear any outstanding fees with your financial institution before closing an account so that your credit isn’t negatively affected.