A savings account provides a safe place to store your money, and it pays interest to help the balance grow faster. But there may come a time when it’s time to close your savings account. Is this a bad idea, or are there instances where closing a savings account could be warranted? This guide dives into reasons why individuals often close savings accounts, the potential consequences associated with this move and how to properly close your account if you choose to move forward. It also explores alternatives that could make more sense for you.
Overview of Savings Accounts
A savings account is a type of bank account designed to provide a safe place to stash away your hard-earned cash. It’s offered by banks and credit unions and lets you earn a small return on your money expressed as an interest rate or annual percentage yield (APY).
Reasons for Closing a Savings Account
Here are some common reasons for savings account closures.
Change in Financial Goals
It’s not uncommon for your financial priorities to shift over time. When this happens, it could make sense to move on from your savings account. For example, if you initially opened a savings account but it’s not fully funded, and you want to move on to investments that earn a greater return, closing a savings account could make sense.
Better Opportunities Elsewhere
Again, traditional savings accounts pay small returns. If you spot more lucrative opportunities that pay significantly higher APYs elsewhere, it could be smart to park your funds elsewhere. In this case, be sure the interest earnings and other benefits associated with the new account or investment outweigh the fees and other costs you may incur when moving your money.
Excessive Fees
Some savings accounts come with monthly maintenance fees that can add up rather quickly and eat into your balance. If you’re over-covering these pesky costs and can’t meet the requirements for a fee waiver, moving on could be a sound idea.
Inactive Accounts
Dormant accounts can be subject to bank-imposed fees. If you have an inactive savings account that you no longer have a use for, consider closing it to avoid unnecessary costs. Doing so helps ensure you only have accounts in your portfolio that make your money work harder for you.
Is It Bad to Close a Savings Account?
Not necessarily, as it depends on your unique situation and reason for the closure. If you’re planning to move your funds to a different account to take advantage of a better interest rate or more services, closing a savings account is a sensible choice. But if you’re closing your account and don’t have a destination for your funds, it could be a bad move.
Potential Consequences of Closing a Savings Account
Here are some potential downsides of closing your savings account.
How Savings Accounts Affect Credit Scores
Your credit score won’t be directly affected when you close your savings account. That said, if payments are automatically drawn from your account, they’ll be returned, and you could incur penalties. Missed payments could also negatively impact your credit report if you don’t make arrangements to have them paid from another account and the outstanding balance(s) are sent to collections.
Loss of Interest Earnings
Again, a savings account generally pays a small amount in interest. Keeping your money in the account allows it to grow over time – the longer, the better. And when you close the account, you forfeit the opportunity to earn interest on your savings unless you park the funds in another interest-earning financial product.
Fees and Penalties
Closing a savings account might sometimes involve fees or penalties, especially if the account is closed too soon after opening. Some banks require a minimum account life before closing it, or they may assess a penalty for an early closure. And if you don’t meet the bank’s minimum balance requirement before closing the account, you could incur fees.
How to Properly Close a Savings Account
If you’ve decided to move forward with closing your savings account, here’s what to do next to ensure a seamless transition.
Reviewing Bank’s Closure Process
Contact your financial institution to inquire about the procedure for closing an account. Some may allow you to request a closure online or by phone. Others will require a visit to a branch (if available).
Transferring Funds
Once you’re familiar with the closure process, the next step is to find a destination for your funds. It’s equally important to identify automatic payments or transfers connected to your account. You want to cancel or update these to avoid costly penalties and adverse credit reporting.
Obtaining Confirmation
The next step is to confirm that all the funds are out of the account before the official closing date. You also want to request a written confirmation from the bank or credit union confirming the account is officially closed and will no longer accept deposits. This written correspondence serves as proof of the closure in case any charges are posted at a later date or if other issues come up.
Finding a Suitable Alternative
Again, if you haven’t already done so, you want to find a viable alternative to your current savings account. Look for accounts with higher interest rates or better terms that allow you to meet your savings goals in your desired timeframe.
Considerations Before Closing a Savings Account
Keep these factors in mind before reaching out to a bank to initiate a savings account closure.
Reviewing Account Features and Services
Evaluate the features and services provided by your current savings account. Some accounts include benefits like free ATM access, budgeting, or higher interest rates on balances. If your current account offers these benefits, losing them could impact your financial plans. Also, check if there are any fees tied to closing the account.
Timing of Account Closure
Timing your account closure well can help you avoid unnecessary charges and maximize your earnings up to the point of closure. Plan ahead to minimize any disruption in your banking activities. And make sure to close it right after interest is added to confirm you maximize your earning potential.
Ensuring All Transactions Are Clear
As previously stated, confirm that all transactions have been fully processed. This includes pending payments and direct deposits. Confirming the clearance of these transactions helps prevent issues later on down the line, like bounced payments and lost checks.
Alternatives to Closing Your Savings Account
Still on the fence about closing your savings account? Here are some alternatives to consider instead.
Maintaining a Minimal Balance
Some banks and credit unions waive monthly maintenance fees if you meet their minimum balance requirement. If fees are a reason why you’re considering an account closure, keep this strategy in mind.
Downgrading to a Different Account Type
Reach out to your bank or credit union if you’re not satisfied with your current savings account. They may be able to downgrade you to an account that is a better fit for your financial situation and goals. That way, you can maintain a solid relationship with your financial institution and lower banking costs.
Utilizing Multiple Accounts for Different Goals
Consider opening several savings accounts for different goals. Whether you want to build an emergency fund, save for a vacation or stash away cash for a new car or home, you’ll have a dedicated account to stash cash for each particular purpose.
