Does Closing a Checking Account Hurt Your Credit?

Does Closing a Checking Account Hurt Your Credit?

Closing a checking account often raises concerns about its impact on credit scores. Understanding the relationship between checking accounts and credit is important for making informed financial decisions.

Checking Accounts and Credit Reporting

Checking accounts are categorized as deposit accounts, not credit accounts. Therefore, routine activity within a checking account, such as making deposits, writing checks, or withdrawing funds, generally does not appear on credit reports maintained by the major credit bureaus: Experian, Equifax, and TransUnion. These bureaus primarily track information related to borrowed money, like credit cards, loans, and mortgages.

While checking accounts themselves are not typically reported to these credit bureaus, negative banking history can be recorded elsewhere. Specialized consumer reporting agencies, such as ChexSystems, collect information on how individuals manage their deposit accounts. ChexSystems reports on issues like chronic overdrafts, unpaid bank fees, or instances of suspected fraud, and this information can remain on file for up to five years. A negative record with ChexSystems can hinder one’s ability to open new bank accounts, as most financial institutions review these reports when processing new applications. ChexSystems reports do not directly affect credit scores, as they focus solely on banking behavior.

Key Elements of a Credit Score

Credit scores, like FICO Score and VantageScore, summarize an individual’s credit risk for lenders. These scores are calculated based on several factors derived from credit reports. Payment history is the most influential factor, typically accounting for 35% of a FICO Score and around 40% of a VantageScore. It reflects timely bill payments; late payments negatively impact the score.

Another significant component is the amounts owed, also known as credit utilization, which makes up about 30% of a FICO Score and is highly influential for VantageScore. This factor considers the total debt an individual carries and the proportion of available credit being used, with lower utilization generally being more favorable. The length of credit history, accounting for approximately 15% of a FICO Score and 20-21% for VantageScore, reflects how long credit accounts have been established. Older accounts and a longer overall credit history tend to positively influence scores.

The credit mix, which considers the diversity of credit accounts like credit cards, installment loans, and mortgages, contributes about 10% to a FICO Score. While it shows the ability to manage different types of credit responsibly, it is a less influential factor compared to payment history or amounts owed. Finally, new credit, including recent applications and newly opened accounts, makes up about 10% of a FICO Score and is moderately influential for VantageScore. Applying for new credit can cause a slight, temporary dip in scores due to hard inquiries, which typically remain on a credit report for two years. Checking account activity is not directly considered in these calculations.

Indirect Financial Implications

While closing a checking account does not directly impact credit scores, financial mismanagement can lead to indirect negative consequences. One such scenario involves unpaid bank fees or a negative account balance. If a checking account is closed with an outstanding negative balance, such as from overdrafts or monthly service charges, and this debt is not repaid, the bank may send the account to collections. Once a debt goes to a collections agency, that collection account can then appear on an individual’s credit report, which will negatively affect their credit score.

Another indirect impact can arise from failed automatic payments. Many link their checking accounts to automatically pay recurring bills, including credit card payments, loan installments, and other subscriptions. If a checking account is closed without updating these linked automatic payments, the missed payments can be reported to credit bureaus. Late payments significantly harm credit scores, particularly if they are 30 days or more past due.

Furthermore, while ChexSystems reporting does not directly influence credit scores, severe negative banking history, such as repeated account abuse or fraud, can make it difficult to open new banking accounts. If an unpaid debt initially reported to ChexSystems eventually escalates and is sold to a collections agency, that agency may report the collection to the major credit bureaus. In such cases, the collection entry then directly causes a negative credit score impact.

Precautions Before Closing an Account

Taking proactive steps before closing a checking account can prevent unintended financial consequences. First, ensure the account balance is zeroed out by withdrawing or transferring all funds. Ideally, transfer funds to a new, established account.

Next, update all automatic payments and direct deposits linked to the account. This includes recurring bill payments and direct deposits for paychecks or government benefits. Update these connections with new account information well in advance to prevent missed payments.

Allow sufficient time for all outstanding checks and pending transactions to clear. Closing an account before all transactions post can lead to an unexpected negative balance or returned payments. Finally, once the account closure process is complete, request written confirmation from the bank that the account has been fully closed and holds a zero balance. Keep this confirmation and recent statements as a record for discrepancies.