Does Closing Your Bank Account Affect Your Credit?
Understand how closing a bank account relates to your credit score. Learn the distinction between deposit accounts and credit, and how to avoid financial pitfalls.
Closing a bank account, such as a checking or savings account, typically does not directly impact your credit score. These accounts are considered deposit accounts, not credit products, meaning they do not involve borrowing money. Unlike loans or credit cards, banks generally do not report the routine activity of these deposit accounts to the major credit bureaus. This distinction is fundamental to understanding why closing a bank account in good standing does not appear on your credit report.
How Credit Scores Are Determined
Credit scores primarily reflect an individual’s borrowing and repayment behavior, indicating creditworthiness to potential lenders. These scores are calculated using information found in your credit report, which details your history with borrowed funds. Key factors include payment history, which accounts for approximately 35% of a FICO score and assesses timely payments on credit obligations. Another component, about 30% of a FICO score, is amounts owed, or credit utilization. This factor considers the proportion of available credit currently being used.
Length of credit history, about 15% of the score, considers how long accounts have been established, including the oldest. New credit, accounting for roughly 10%, considers recent applications for credit and newly opened accounts. The final 10% is your credit mix, assessing different account types like credit cards, mortgages, and auto loans. These factors collectively provide a comprehensive view of an individual’s financial responsibility regarding debt.
Why Bank Accounts Don’t Directly Affect Credit
Checking and savings accounts are deposit accounts for holding and managing your funds, not extending credit. Since they don’t involve borrowing, their activity isn’t relevant to creditworthiness. Banks do not routinely report account activity to the three major credit bureaus: Experian, Equifax, and TransUnion.
Your credit report is a record focused on how you manage debt and credit obligations. Deposit accounts are not in this category, so their information isn’t in your credit file. Therefore, closing a bank account in good standing will not appear on your credit report or directly influence your credit score. The absence of a direct reporting mechanism means these actions do not factor into the algorithms that calculate credit scores.
Potential Indirect Influences on Your Credit
While closing a bank account does not directly impact your credit, certain oversights during the process can lead to negative consequences for your credit score. One common scenario involves overdrawn accounts or unpaid fees. If an account is closed with a negative balance, or if fees remain unpaid, the financial institution may send the outstanding debt to a collection agency. Once in collections, this debt can be reported to the major credit bureaus, appearing as a derogatory mark on your credit report and potentially lowering your score.
Another significant risk arises from linked automatic payments. Many individuals have recurring bills, loan payments, or credit card payments set up to automatically debit from their bank accounts. If a bank account is closed without updating these payment arrangements, the automatic debits will fail.
Missed payments on credit accounts, especially if 30 days or more past due, are reported to credit bureaus and can harm your credit score. Furthermore, insufficient funds or bounced checks due to an empty or closed account can lead to additional fees from the bank and the payee. If these fees or the original payment amounts remain unsettled, they can also be sent to collections. Similar to overdrawn accounts, any debt that goes to collections can negatively impact your credit report.
Steps for Closing a Bank Account Responsibly
To avoid unintended negative impacts on your credit, several responsible steps should be taken when closing a bank account. First, transfer all funds from the account you intend to close to a new or existing account. This ensures your money is accessible and prevents the old account from becoming overdrawn.
Next, it is crucial to update all automatic payments and direct deposits. This includes recurring bill payments, subscriptions, and any direct deposits like payroll or government benefits. Make sure these are fully transitioned to your new account before the old one is closed to prevent missed payments and potential late fees.
Reviewing recent account activity is also important to identify any unknown or infrequent recurring charges that might otherwise be overlooked. Ensure there are no pending transactions that have not yet cleared, as these could lead to an unexpected negative balance. Finally, confirm with the bank that the account balance is zero and request written confirmation that the account has been officially closed. This documentation serves as proof of closure and can be helpful in resolving any future discrepancies.