There are a number of reasons why you might want to close a bank account — poor customer service, high fees, you’re moving and will lose access to a brick-and-mortar branch. But before you shut down the account, you should have a plan and know how closing an account will affect you financially. Do you know where you will keep your money instead? Just as importantly, will closing a bank account hurt your credit score?
A number of things feed into your credit score. Credit scores also help determine a lot of things in your financial and personal life — whether you’re approved for a loan, what your interest rates will be, if you can rent an apartment, get hired for a certain job, or open an account with a utility company.
FICO Scores, the most commonly used scoring model, are made up of five components: payment history, credit utilization, credit history length, credit mix, and new credit.
If you’re looking to close a checking account, make sure you know how it’ll affect your finances so that you won’t be taken off guard.
Does Closing a Bank Account Affect Your Credit Score?
No, closing an account won’t directly affect your credit score unless there are issues with your account. You are free to switch bank accounts within the same institution or to a different one at any time.
Banks may check your credit reports and scores when you open an account with them, but they don’t necessarily report your banking activity to the popular credit bureaus — Equifax, Experian, and TransUnion.
Related article: Excess Activity & Inactivity Fees: The Cost of Too Much (or Too Little) Banking Activity
Credit scores are primarily based on credit accounts, or money that has been borrowed. This includes credit card accounts, mortgage loans, personal loans, auto loans, student loans, or lines of credit. When you put money into a checking or savings account at a bank, you generally make purchases and conduct transactions using only the money in your account, which is your own money, rather than with loans or money borrowed from a financial institution. This keeps standard banking activity off of your credit reports and scores.
Closing bank accounts — like checking and savings accounts — does not typically affect your credit score, but closing credit cards and other credit accounts can. Credit card companies and lenders regularly report account openings and closings to credit bureaus, which are factored into your credit reports and scores.
When Will Closing a Bank Account Hurt Your Credit Score?
While closing a bank account typically does not hurt your credit score, there are instances when it can. If you have a negative balance, you may run into some trouble. If you try to close an account that has a negative balance or outstanding overdraft fees, your bank will simply deny your request.
However, if you have a negative balance for an extended period of time, your bank can involuntarily close the account and report it to a collection agency. Collection agencies are designed to collect money from consumers on behalf of businesses who have not had success with garnishing funds. Collections activity is reported to the credit bureaus, added to your credit reports, and negatively impacts your credit score.
Accounts that are with collection agencies remain on your credit report for seven years after the occurrence, even if you’ve settled the balance. You should check your credit report regularly to make sure that it does not include any outdated information. Your score calculation is determined by the information on your credit reports; if there is outdated information in your report, it could be dragging your score down.
How Can You Close Your Bank Account Correctly?
If you want to close a bank account and don’t want it to affect your credit score, you first need to make any of your negative balances positive. You can transfer money from a savings account or make a deposit.
You could also contact your bank and request a refund on any fees that have been added to your account. If you have withdrawals or purchases that have overdrawn your account, you will still have to pay for those, but having the bank remove the fees can help cut down the cost of what you have to repay.
Before you close your account, you should also make sure that you don’t have any outstanding or pending checks or automatic payments scheduled to come out of your account. You could be on the hook for any fees or payments that attempt to post to your account after it has been closed. You should also check with your bank to see if there is a fee involved for closing an account within a certain amount of time of opening it.
