Does Closing a Bank Account Lower Your Credit Score?

A credit score provides a numerical representation of an individual’s creditworthiness. Understanding the factors that contribute to a credit score can help clarify how various financial actions influence it. This article will focus on the relationship between bank accounts and credit scores, and the elements that truly determine credit standing.

Bank Accounts and Credit Scores

Closing a standard deposit bank account, such as a checking or savings account, does not directly impact an individual’s credit score. These accounts are not considered credit products. Banks and credit unions do not report deposit account activity, including closures, to the major credit bureaus.

Credit reports primarily track how individuals manage borrowed money, not their cash balances or deposit account movements. Therefore, opening or closing a checking or savings account has no direct bearing on credit scores. However, indirect impacts can occur. For example, closing an account might lead to missed payments on credit obligations due to forgotten automatic transfers. If an account is closed with a negative balance that is then sent to collections, this activity could be reported and negatively affect a credit score.

What Your Credit Score Measures

A credit score is a statistical tool lenders use to assess a borrower’s credit risk. It summarizes an individual’s borrowing and repayment history, predicting their likelihood of repaying a loan on time. This score reflects how reliably someone manages borrowed money.

Credit bureaus collect the data used to calculate these scores. Lenders use credit scores to make informed decisions when evaluating applications for credit products, such as mortgages, auto loans, and credit cards. A higher score indicates a lower risk to lenders, which can lead to better interest rates and more favorable loan terms.

How Your Credit Score Is Determined

Credit scoring models evaluate several categories of financial behavior and history to calculate an individual’s credit score.

Payment history holds significant importance, reflecting whether bills have been paid on time. Late payments, collections, or bankruptcies can substantially lower a score, and these negative marks can remain on a credit report for up to seven years. Setting up automatic payments can help ensure timely payments and avoid such negative impacts.

Amounts owed, often referred to as credit utilization, also play a substantial role in score determination. This factor measures the amount of credit used relative to the total available credit. Maintaining a credit utilization ratio below 30% across all revolving accounts is generally advisable, as higher utilization can negatively impact scores.

The length of credit history considers how long accounts have been open and the average age of all accounts. A longer history of responsible credit management can positively influence a score. Consequently, closing older credit accounts, even if unused, can shorten the average age of accounts and potentially affect the score.

New credit inquiries and recently opened accounts can temporarily affect scores. When an individual applies for new credit, a hard inquiry is typically placed on their credit report, which can cause a small, temporary dip in their score. Opening multiple new accounts within a short period is often viewed as a higher risk by lenders.

Finally, the credit mix, or the variety of credit accounts an individual manages, contributes to the score. Having a healthy mix of different types of credit, such as installment loans (like mortgages or auto loans) and revolving credit (like credit cards), demonstrates an ability to handle diverse financial obligations. While not the most heavily weighted factor, a diverse and responsibly managed credit portfolio can support a strong credit score.