Your credit score is an important financial metric that impacts your interest rates, ability to borrow capital, and other areas of your life. Landlords and utility companies take a look at your credit report when reviewing your application and determining price points.
Given this importance, it makes sense that many people want to improve their credit scores. Furthermore, it’s important to avoid making mistakes that reduce your credit score. If you’re thinking about closing a bank account, you should first consider how it can impact your credit score.
Does Closing a Bank Account Hurt Your Credit?
Closing a bank account on its own does not hurt your credit score. Banks do not report account closures to the major credit bureaus. However, a closed account can still affect your credit score indirectly.
How Bank Accounts and Credit Scores Are Connected
Credit scores and bank accounts don’t present an immediate connection. However, if you stretch out the timeframe, there is a deeper connection than initially expected.
Direct and Indirect Connections
A closed checking or savings account won’t have a direct impact on your credit score. You can transfer the funds from your account to another account right before closing it so you can still cover your bills.
However, there are some indirect connections that can impact your credit score. One of those connections occurs if you have a negative balance. Closing a bank account doesn’t free you from any unpaid dues that you incurred with overdraft fees. If the debt remains unpaid for too long, a financial institution can hand it off to a debt collection agency. That agency will report your debt to the major credit bureaus, which will hurt your credit score.
Your credit score can also take a hit if closing your bank account impacts your ability to make on-time payments for your bills. If there is no impact on your payment history, closing a bank account won’t do anything to your credit score.
The Role of Credit Bureaus
Credit bureaus review your financial history and create a credit report that creditors can access. Most lenders will review your credit profile before giving you a mortgage, auto loan, or similar financial product. Credit bureaus allow creditors to assess the risk of each borrower to minimize the likelihood of defaults.
Scenarios Where Closing a Bank Account Can Affect Your Credit
While it’s common for people to close their bank accounts without any impact on their credit scores, there are some exceptions to keep in mind.
Overdraft Situations
An overdraft account’s negative balance can be handed off to a debt collection agency. If that happens, the unpaid debt can show up on your credit report and lower your credit score.
Linked Credit Products
If you have any linked credit products to your closed account, you will have to pay off any outstanding balances to maintain a good payment history. It’s a good idea to pay off any linked credit products before closing your bank account.
When Closing a Bank Account Does Not Affect Your Credit
Luckily, closing a bank account usually does not affect your credit score. These are the common scenarios where your credit score will remain the same.
Checking and Savings Accounts
Banks do not report any activity related to your checking and savings accounts to the major credit bureaus. You can close these accounts without any effect on your credit score as long as you don’t have negative balances on them.
Absence of Overdrafts or Linked Accounts
If you close your bank account without any overdraft or linked credit products, it will not have any impact on your credit score.
Steps to Take Before Closing a Bank Account
While closing a bank account can streamline your finances and simplify your online banking experience, you shouldn’t rush to close an account. These are some of the steps you should take before closing one of your accounts.
Verify Outstanding Balances
Make sure you don’t have any debt in your bank account. Most mobile banking apps let you quickly check your balance. It should be positive or $0.
Cancel Automatic Payments and Transfers
The next step is to cancel any automatic payments or transfers. That way, money isn’t set to go into a defunct account. Furthermore, you don’t want money to move out of your bank account right before you close it.
Transfer Remaining Funds
Any remaining funds should be moved into another bank account. You can put the extra cash into a checking account, savings account, CD, money market account, or another type of account.
How to Properly Close a Bank Account
Closing a bank account is a simple process. Here’s what you have to do.
Informing Your Bank
Customer support can guide you through the process of closing your account. Most banks have customer service representatives available on weekdays, but some financial institutions offer 24/7 support.
Getting Written Confirmation
You can ask your bank to provide written confirmation that they received your request. This confirmation should also mention that your account was closed.
Alternative Strategies to Avoid Credit Impact
Most people can close their bank accounts without worrying about how it will impact their credit scores. However, a few exceptions exist that have been covered. If any of those exceptions apply to your financial situation, you can consider these alternative routes to avoid any impact on your credit score.
Gradual Transition to a New Account
You don’t have to rush to close an old bank account. Instead, you can make the transition more gradual by paying off your overdraft fees and credit products. You can also wait to close your account until you have obtained a significant financial product, such as a mortgage or an auto loan. If you don’t need to apply for new credit for 6-12 months, you can usually withstand any indirect credit impacts by the time you want to apply for a new loan or line of credit.
Keeping the Account Open with a Minimum Balance
If you want to take a gradual approach, you should make sure your bank account fulfills the minimum balance requirement. That way, you’ll avoid the monthly service fee, which is a common banking expense. Luckily, some accounts do not have monthly maintenance fees, which makes this alternative strategy easier.
Conclusion: Understanding the Impact of Closing a Bank Account on Your Credit
If you have an overdrawn account or credit products that are linked to your bank account, you should be cautious before closing it. However, if those scenarios do not apply to you, closing your account likely will not have any impact on your credit score.
Building credit and preserving a high credit score is important for receiving loans and getting favorable rates. It’s a bad idea to tinker with any of your financial products leading up to a major loan application, such as a mortgage or a refinance.
Frequently Asked Questions
Switching banks typically does not affect your credit score. Two notable exceptions are if you leave your old bank with an overdrawn account or have credit products tied to your old bank account.
Each bank is different. It can take a few days or weeks to close a bank account. Staying in touch with customer support can speed up the process and provide regular updates.
