Let’s say you’re ready to close your bank account. Maybe you’re done with the high monthly charges, or the bank hasn’t treated you well or you’ve found a better bank. Whatever the reason is, you should stop and ask yourself, is it bad to close a bank account? After all, you don’t want to impact your credit score unknowingly.
The answer is yes, closing a bank account can indirectly impact your credit score. While banks don’t report consumer bank account information to the credit bureaus, they can report a checking account that is not in good standing.
That’s why it’s essential you learn what the potential consequences are and what you should consider before closing your bank account.
What Happens When You Close a Bank Account?
Before you consider closing your bank account, make sure you have a new one set up elsewhere. It’s essential you have at least one savings and one checking account.
Next, change your direct deposit payment details (if this is how you get paid) to your new bank account. At the same time, you’ll want to change the banking information for any pre-authorized debits, such as car insurance, rent or mortgage payments.
Make sure you stop writing checks for your old checking account. You’ll also want to track the checks you’ve written recently and make sure they’ve all cleared.
Give yourself a couple of weeks to monitor your old and new accounts. You’re looking to make sure your old account no longer has any activity and your new account is problem-free.
When you’re ready, you can call or visit your financial institution to close your account. Ask if there are any fees associated with closing the account and approximately how long it will take. If there’s any money left in the account, withdraw it or transfer it to your new account.
Check back in and make sure you cannot access the account after it’s been closed to verify the process is complete.
Closing a Checking Account
So, does closing a bank account hurt your credit? It’s important to understand that if you close a checking account with a negative balance still outstanding, this data will be reported to ChexSystems. (We’ll discuss ChexSystems in more detail below.)
Additionally, if the balance remains outstanding for an extended period of time, banks can send your account to a collection agency. And a collection agency will likely report to a credit bureau, which could impact your credit score.
Closing a Savings Account
Like a checking account, your savings account can incur various fees that cause it to have a negative balance. You could have insufficient fund fees, a wire-transfer fee, ATM fees or charges for not maintaining a minimum balance.
Ensure your savings account doesn’t have any outstanding fees before you close it. If there will be a fee for closing the account, pay it up front so it doesn’t come out of your closed savings account.
When Closing a Bank Account Affects Your Credit Score
The only time closing a bank account affects your credit score is if it has a negative balance. If you take too long to pay this balance to the bank, the financial institution can send the debt to a collection agency. A collection agency collects debts on behalf of third parties. And, in their debt collection process, a collection agency will usually report delinquencies to credit bureaus. This unpaid debt then becomes a part of your credit score, ultimately lowering it.
Another critical factor to consider is how your checking account’s overdraft protection can impact your credit report.
Most banks encourage their users to sign up for overdraft protection because it’s like a “safety net” for forgotten bills or payments. When the bank applies overdraft protection to your account, it agrees to cover your overdraft based on the limits, conditions and fees spelled out in your agreement with them. This is especially useful for surprise charges.
However, what most consumers don’t know is that overdraft protection is considered a line of credit. So, when you add overdraft protection to your account, you may see a hard inquiry on your credit report. And a hard inquiry typically drops your credit score by a few points for a couple of months.
If there are any issues with your overdraft protection down the line, it can directly impact your score. Some of these issues might be:
- The bank decided your overdraft protection has been abused and cuts off the line of credit
- Your account has been closed with an outstanding balance and the bank sends the outstanding balance to a collection agency
The bank can choose to report these issues to the credit bureaus, where it will become part of your credit report.
According to Bankrate, the banks and credit unions created ChexSystems to help identify problematic account holders who aren’t reliable in managing their bank accounts. ChexSystems identifies people who have frequently abused or closed checking accounts or who have multiple overdrawn balances.
As previously mentioned, banks don’t generally report your checking account information to credit bureaus. But they can report it to ChexSystems. The main reasons for reporting an account to ChexSystems are:
- The individual closed an account with an outstanding overdraft balance
- The individual has a history of multiple overdrafts
- The individual abused his or her account or ATM access
- The bank suspects the individual used his or her bank account(s) to participate in fraud
- The individual opens and closes accounts too often
- The individual frequently loses debit cards or checks
Once you’ve been reported to ChexSystems, it can become incredibly difficult to open another bank account. The major financial institutions rely on ChexSystems records before approving individuals for new accounts. Similar to the credit bureaus, ChexSystems has ratings for consumers that range from 100 to 899. A higher score indicates a less risky consumer.
If you’re reported to ChexSystems, expect to have that blemish on your history for up to five years. Having more than one report against your name in the system means you’ll likely be unable to do any regular banking and have to sign up for a second-chance account—less desirable accounts which have more requirements and offer fewer services than regular accounts
You can request a copy of your ChexSystems report once every 12 months or if you’ve been denied an account in the last 60 days. Request your report directly through ChexSystems and you should receive it within five business days.
How to Close a Bank Account Without Hurting Your Credit
You can close a bank account without hurting your credit score. Simply make sure you have all your bases covered by following these steps:
- Ensure you don’t have an outstanding negative balance on the account.
- Make sure you’ve identified if there will be any fees for closing the account, and pay them up front or leave enough money in the account to pay them off.
- Don’t close and open several accounts back to back.
- Check your closed account to ensure no hidden negative balance pops up.
- Consider the potential impact of overdraft protection on your credit score when you open a new account.
Now you have the answer to the question, “Is it bad to close a bank account?” And hopefully you understand the proper steps you need to take to close your account safely without negative consequences to your credit report.
Ultimately, you always want to make the right decisions to benefit your financial health and protect your credit score. After all, a good credit score opens many doors in life, such as approvals for car loans, mortgages, rental agreements and even job opportunities.
If your credit score is lower than it should be, you can work to improve your credit with our credit repair services. We can help you remove inaccurate or unfair negative items listed on your credit report, and you’ll also learn about healthy credit score habits along the way. Contact us today to find out more.
Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.
Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.
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