Bank accounts don't have to be forever. You might want to close an account because you've found a better account, you're relocating to a new state where your bank has no branches, or because you're dissatisfied with your old bank's customer service. Before you move on from your bank, you want to know if closing a bank account affects credit scores, so you can take precautions if necessary.
Your credit score affects many of your financial decisions. It impacts your ability to get a credit card, rent an apartment, buy a house or car, have utilities turned on in your name, and more. Of course, you want to avoid doing anything that would negatively affect your credit score, even if it means sticking out a bad relationship with a bank.
How Closing a Bank Account Affects Your Credit Score
The good news is that closing a bank account doesn't affect your credit score. As long as there are no issues with your account, you can switch to a new bank without worrying about damaging your credit score.
While banks may check your credit when you apply to open an account, under normal circumstances your bank activity isn't factored into your credit score at all. That means your bank deposits, withdrawals, and daily transactions don't help or hurt your credit score. Even overdrafts don't affect your credit score, assuming you pay the overdraft fee and clear up any outstanding negative balance before the bank takes action.
Many people mistakenly believe that all financial information, including bank account activity, is factored into their credit scores. That's not the case. Your credit score is calculated based only on information included in your credit report, and your bank details aren't reported to the credit bureaus.
Credit scores are based on borrowing activities, like credit cards and loans, serious delinquencies, and public records. You can check for free to see the types of accounts on your credit report by visiting AnnualCreditReport.com. (However, this service reports no credit scores.) You can also use a free service like Credit Karma, Credit Sesame, or WalletHub to keep tabs on changes to your credit information.
While closing a savings or checking account won't affect your credit score, closing a credit card account can. Credit card accounts are regularly reported to the credit bureaus and factor into your credit score.
When Closing a Bank Account Can Hurt Your Credit
There is a situation where closing a bank account could affect your credit score, in a bad way. If your account is overdrafted and has a negative balance when you close it (or when the bank closes it because you haven't caught up), the negative balance may be sent to a collection agency for further action. Third-party collection agencies collect debts on behalf of other businesses.
Once a collection agency takes over your account, they will likely report the account to the credit bureaus. At that point, it will go on your credit report and be factored into your credit score. Unfortunately, collections remain on your credit report for seven years from the first date of negative activity, even after payment is made.
Mishandling your checking account can also land you in ChexSystems, which is a consumer reporting agency for financial institutions. Banks often use ChexSystems to determine whether to allow you to open a checking account. Any negative reports made to ChexSystems, including overdrafts you never cleared up, will remain in the system for up to five years. You may have a hard time opening a checking or savings account if you have a negative record with ChexSystems, but these records aren't included in your consumer credit score.
How to Close Your Bank Account the Right Way
If you're planning to close your bank account and want to avoid affecting your credit score, make sure to clear up any negative balance first. Talk to the bank to make payment arrangements if you can't afford to pay the balance right away.
Don't assume your old account is "out of sight, out of mind" just because you've already moved on to a new bank. You'll have to take care of any outstanding checks, pending transactions, or autodrafts that post to your account after it's been closed. Your old bank will likely notify you of any outstanding balance by mail, so be sure to open up anything you receive from them.