If you’re thinking about closing a bank account, a common question is whether closing a bank account will negatively impact your credit score. The good news is that closing a savings or checking account that’s in good standing will not negatively impact your credit.
However, before you close your bank account, there are a few things you should consider to ensure it is done correctly and doesn’t result in any credit-related issues.
How closing a bank account affects your credit
Closing a bank account won’t directly affect your credit score, as credit scores give most weight to credit accounts like credit cards and car loans.
However, closing a checking or savings account can have a negative impact on your credit score.
Firstly, having a negative bank balance can hurt your credit. Also, having a credit card tied to your bank account or missing payments on other bills can lower your credit score. Negative bank balances and missed payments can be reported to the credit bureaus and affect your credit.
The three major credit reporting agencies
The credit reporting agencies Equifax, Experian, and TransUnion keep reports on how consumers manage their debt, so the information on an individual’s credit report may include the balance and payment history of mortgages, personal loans, credit cards, and other debts.
Credit reports don’t typically include bank account information, so closing an account that’s in good standing won’t affect your credit.
Closing a bank account with a negative balance, however, is a different story. If you close an overdraft account and don’t eliminate the negative balance (including paying the overdraft fees), the bank may send the debt to a collection agency. The collection agency will notify the three credit bureaus, which could result in a lower credit score and remain on your credit report for up to seven years.
Checks Systems
ChexSystems is a professional reporting agency that operates under the Fair Credit Reporting Act. Financial institutions report consumer information to ChexSystems, such as records of bounced checks and outstanding negative balances. Therefore, if you close a bank account that has poor credit standing, it may show up on your ChexSystems report.
The information will be stored in your ChexSystems report for five years and will be used by banks when deciding whether to approve your bank account application.
Closing a bank account in good standing will not negatively impact your ChexSystems score.
How to close a bank account without damaging your credit
Any outstanding negative balances on closed bank accounts can eventually be reported to debt collection agencies and credit bureaus. If you plan to close your existing bank accounts and open new ones elsewhere, follow these steps to ensure you do so without damaging your credit:
1. Open a new bank account before closing your old one.
It may take some time to deposit funds into your new account and order checks, so in the meantime, it’s important to keep using your old account for things like paying bills online, writing checks, and transferring money through services like Zelle.
Otherwise, your credit could be damaged if you temporarily lose access to a way to pay your bills.
2. Deposit funds into the new account and reroute your direct deposits there.
Put money into your new account, whether that’s by depositing cash at a branch or electronically transferring funds from your old account to your new account.
If your paycheck is set up to be directly deposited into your old bank account, provide your new bank account information to your employer and ask them to reroute your direct deposit to your new account.
3. Update your automatic bill payments.
Once you have enough funds in the new account, update any automatic payments that are deducted from this account. This could include rent or mortgage, student loans, utilities, insurance, gym memberships, or other subscriptions.
Check the transaction history on your old bank account to make sure you haven’t missed any automatic payments, which could cause your old account to have a negative balance.
4. Close your old account.
After opening a new bank account, we recommend waiting at least a month before closing the old account, so you can be sure that your direct deposits have been successfully rerouted and all automatic bill payments have been transferred.
Conclusion
Closing a bank account in good standing will not negatively impact your credit score. However, if you have a negative bank account balance, it is important to eliminate that balance before closing the account. Otherwise, if the negative balance is not eliminated, it could negatively impact your credit score.
Ensuring that direct debits and automatic bill payments are working smoothly on your new bank account before closing your old one can also help avoid missed payments and potential credit issues.
Knowing what situations can negatively impact your credit is essential to maintaining a healthy financial profile so that if you ever need to apply for new credit or present your credit report to any organization in the future, you can be prepared with a good credit history.
