Does a Closed Bank Account Affect Credit?
Does closing a bank account affect credit? Uncover the indirect ways banking history impacts your financial reputation and how to manage it wisely.
The decision to close a bank account often raises questions about its potential impact on one’s credit standing. While many financial actions can influence credit scores, the closure of a checking or savings account typically does not directly affect credit. However, understanding the indirect ways certain banking behaviors can lead to negative credit implications is important for maintaining financial health.
Understanding Direct Credit Impact
Closing a traditional checking or savings account generally does not directly impact your credit score. Unlike credit cards or loans, which involve borrowed money and repayment history, bank accounts hold your own funds. Banks do not typically report deposit account activity, including closure, to the three major credit bureaus (Experian, Equifax, and TransUnion). Therefore, closing an account in good standing will not appear on your credit report or influence your credit score calculations.
How Bank Account Issues Can Affect Credit
While the act of closing a bank account itself does not impact your credit score, certain issues related to bank account management can indirectly lead to negative credit consequences. One common scenario involves repeated overdrafts or unpaid bank fees. If an account consistently has insufficient funds or accumulates unpaid charges, the financial institution may eventually close the account due to a negative balance.
When an account is closed by the bank due to an outstanding negative balance, the unpaid debt can be sent to a third-party collection agency. Once a collection agency acquires the debt, they can report this information to the major credit bureaus. This action will appear as a collection account on your credit report and can significantly lower your credit score, potentially remaining on your report for up to seven years from the original delinquency date.
Beyond traditional credit reports, ChexSystems tracks banking activity. This specialty consumer reporting agency collects information on deposit and debit history, including bounced checks, unpaid fees, and involuntary account closures. Banks use ChexSystems to assess new account applicants. A negative history reported to ChexSystems can make it difficult to open new accounts, though it does not directly affect your traditional credit score.
Steps for Proper Account Closure
Properly closing a bank account involves several steps. First, ensure the account has a zero balance. All pending transactions, such as outstanding checks, automatic payments, and direct deposits, must clear or be redirected. Transfer or withdraw any remaining funds.
Next, update all recurring automatic payments and direct deposits to a new account before closing the old one. This includes bill payments, subscriptions, and income sources like paychecks. Failure to update this information can result in missed payments, leading to late fees or negative credit reporting.
After confirming all transactions have cleared and the balance is zero, formally notify your bank of your intent to close the account. This can be done in person, by phone, or online. Obtain written confirmation of the account closure, such as an email or letter, and retain this record as proof the account was closed in good standing.
Reviewing Your Financial Reports
After closing a bank account, it is prudent to review your financial reports to ensure no negative information has inadvertently appeared. You are entitled to a free copy of your credit report from each of the three major credit bureaus—Experian, Equifax, and TransUnion—once every 12 months, which can be accessed through AnnualCreditReport.com. When reviewing these reports, check for any unexpected collection accounts or other derogatory marks that might stem from unpaid bank fees or other account issues.
In addition to credit reports, request your ChexSystems consumer report. This report details your banking history, showing negative entries like unpaid overdrafts or account closures due to misuse. Obtain a free copy once every 12 months via their website, phone, or mail. Regularly checking both reports allows you to monitor your financial standing and identify potential errors.