Does Opening and Closing Bank Accounts Affect Credit?
Does opening or closing bank accounts affect your credit? Understand the real impact on your financial standing, from direct effects to indirect influences.
Many wonder if opening or closing bank accounts affects their credit score. This relationship is often misunderstood because banking activities operate under different reporting systems than credit accounts. Understanding these distinctions clarifies how your financial behaviors influence your overall financial standing.
The Direct Impact on Credit Scores
Opening or closing standard checking and savings accounts does not directly affect your credit score. These deposit accounts are not considered credit products, and information about them, including balances and transactions, is not reported to the three major consumer credit bureaus: Experian, Equifax, and TransUnion. Therefore, simply opening or closing an account will not appear on your credit report or influence your score.
However, banks and credit unions utilize a specialized consumer reporting agency called ChexSystems. ChexSystems tracks banking history, focusing on issues like overdrafts, unpaid fees, or accounts closed due to negative balances or suspected fraud. This system helps financial institutions assess the risk of new account applicants, distinct from credit bureaus.
ChexSystems reports provide information on blemishes in banking history, such as non-sufficient funds activity or returned checks. A negative record with ChexSystems can hinder your ability to open new bank accounts, but this does not directly translate to a lower credit score. The data collected by ChexSystems pertains to deposit account behavior, not how well you manage borrowed money or repay debt.
Indirect Influences on Your Credit Standing
While opening or closing a bank account does not directly impact your credit score, certain related actions or financial products can indirectly influence it. If a bank account is closed with an unpaid negative balance, such as outstanding overdraft fees, the bank may send this debt to a collections agency. Once in collections, this debt can be reported to the major credit bureaus, harming your credit score. This negative mark can remain on your credit report for up to seven years from the original delinquency date.
Banks also offer various credit products, such as secured credit cards, personal loans, or lines of credit. Activity on these credit products, including payment history and credit utilization, is reported to credit bureaus. Responsible management of these credit products can positively affect your credit score, while missed payments or high balances can negatively impact it.
When you apply for a new bank account, some institutions may perform a “soft inquiry” on your credit report. This type of inquiry is used for identity verification or to assess risk and does not affect your credit score. Soft inquiries are different from “hard inquiries,” which occur when you apply for credit products like loans or credit cards and can cause a small dip in your score.
Using a bank account to make timely payments on credit cards or loans supports a healthy credit score. While the bank account itself does not influence the score, the payment history on the credit product is a primary factor in credit score calculations. Ensuring sufficient funds are available for scheduled bill payments prevents late or missed payments, which are detrimental to credit.
How Banks Evaluate Account Applications
When you apply to open a new checking or savings account, banks primarily assess your banking history rather than your credit score. Financial institutions use consumer reporting agencies like ChexSystems to review an applicant’s deposit account behavior. This review helps banks determine the risk of offering you an account.
ChexSystems reports contain details such as previous account closures due to fraud, overdrafts, or unresolved negative balances. A history of frequently opening and closing accounts may signal financial instability. If your ChexSystems report contains negative information, a bank may deny your application for a new account.
A denial based on ChexSystems information does not directly impact your credit score. However, it signals to financial institutions that you present a higher risk as an account holder. You are entitled to a free copy of your ChexSystems report annually or if you are denied an account, to review and dispute inaccuracies.