You may want to close a bank account because you’ve found a better account, you’re moving to a new state where your bank has no branches, or you’re dissatisfied with the customer service at your old bank. Before you switch banks, you want to know if closing a bank account affects your credit score, so you can take necessary precautions if needed.
How closing a bank account affects your credit score
The good news is that closing a bank account does not affect your credit score. As long as there are no issues with your account, you can move to a new bank without worrying about damaging your credit score.
While banks may check your credit when you apply to open an account, under normal circumstances, your banking activity does not factor into your credit score at all. This means that deposits, withdrawals, and daily transactions at the bank neither help nor hurt your credit score. Even overdrafts do not affect your credit score, provided you pay the overdraft fees and settle any negative balance before the bank takes action.
Note: Many people mistakenly believe that all financial information, including banking account activity, affects their credit scores. This is not the case. Your credit score is calculated based solely on the information included in your credit report, and the details of your bank account are not reported to credit bureaus.
Credit scores are based on borrowing activities, such as credit cards and loans, serious charges, and public records. You can check for free to see what types of accounts are in your credit report by visiting AnnualCreditReport.com. (However, this service does not provide credit scores.) You can also use a free service like Credit Karma, Credit Sesame, or WalletHub to monitor changes in your credit information.
Note: While closing a savings or checking account will not impact your credit score, closing a credit card account can affect it. Credit card accounts are typically reported to credit bureaus and impact your credit score.
When closing a bank account can negatively affect your credit score
There is one situation where closing a bank account can negatively impact your credit score. If your account is delinquent and has a negative balance when you close it (or when the bank closes it because you haven’t caught up on payments), the negative balance may be sent to a collection agency for further action. Third-party collection agencies collect debts on behalf of other companies.
Once a collection agency takes over your account, it is likely to report the account to credit bureaus. At that time, it will be listed on your credit report and will affect your credit score. Unfortunately, collections remain on your credit report for seven years from the date of the first negative activity, even after repayment.
Note: Mismanagement of your checking account can also result in a record in ChexSystems, which is a consumer reporting agency for financial institutions. Banks often use ChexSystems to decide whether to allow you to open a checking account. Any negative reports made in ChexSystems, including unpaid overdrafts, will remain in the system for up to five years. You may have difficulty opening a checking or savings account if you have a negative record in ChexSystems, but these records do not factor into your consumer credit score.
How to
Closing Your Bank Account the Right Way
If you are planning to close your bank account and want to avoid impacting your credit score, ensure that you settle any negative balance first. Speak to the bank for payment arrangements if you are unable to pay off the balance immediately.
Do not assume that your old account is “out of sight, out of mind” just because you have already moved to a new bank. You will need to deal with any pending checks, pending transactions, or automatic withdrawals that are sent to your account after it is closed. Your old bank is likely to notify you of any outstanding balance by mail, so be sure to open anything you receive from them.
Frequently Asked Questions (FAQs)
Will closing a bank account negatively affect my credit score?
Closing all of your bank accounts at once may be a bad idea, as having at least one bank account makes your financial life much easier. As long as you keep at least one account open, and the account you are closing is in good standing, there will be no negative effects when closing a bank account. Closing credit accounts, such as credit cards, can affect your credit score, but this does not apply to standard deposit accounts.
What happens if your bank closes?
If your banking institution closes its doors altogether, you are protected by the Federal Deposit Insurance Corporation (FDIC). The bank is likely to handle its closure responsibly, providing you with ample notifications and opportunities to transfer your money to another institution. However, even if the bank closes suddenly without notice, your money is insured up to $250,000 by the FDIC.
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Sources:
Consumer Financial Protection Bureau. “What Is a Credit Score?”
Consumer Financial Protection Bureau. “My Bank or Credit Union Closed My Checking Account. Will This Hurt My Credit?”
Consumer Financial Protection Bureau. “What Are Specialty Consumer Reporting Agencies and What Kind of Information Do They Collect?”
Consumer Financial Protection Bureau. “How Do I Get a Copy of My Credit Reports?”
Consumer Financial Protection Bureau. “How Long Does Negative Information Stay on My Credit Report?”
ChexSystems. “Frequently Asked Questions (FAQs).”
Consumer Financial Protection Bureau. “Can I Close My Account Whenever I Want?”
Source: https://www.thebalancemoney.com/does-closing-a-bank-account-affect-credit-score-4159898
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