Bank accounts generally aren’t included in credit reports, which means that your banking activity (including opening and closing accounts) won’t have any direct impact on your credit scores.
That said, having a negative balance when a bank account is closed could hurt your credit scores if the bank sends that balance to collections. Here are key things to consider before closing your bank account to make sure it doesn’t end up causing any credit-related issues.
How Bank Accounts Relate to Credit
The three major credit bureaus (Equifax®, Experian®, and TransUnion®) maintain reports on how consumers manage borrowed money. As a result, your credit report will contain information on your credit accounts, such as mortgages, personal loans and credit cards, including balances and payment history.
What’s not typically included in a credit report is information about your bank accounts, such as your checking account. As a result, closing an account in good standing won’t hurt (or build) your credit. If, on the other hand, you close a bank account that has a negative balance or unpaid fees, the bank may send those debts to a collection agency, which can report the delinquency to the credit bureaus.
An overdrafted account can also get reported to ChexSystems, a reporting agency for the banking industry. ChexSystem collects information about your previous problems with deposit accounts. This information stays on your ChexSystems report for five years, and can be used by banks and credit unions when deciding whether to approve bank account applications. Closing a bank account in good standing, however, won’t put a negative mark on your ChexSystem report.
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Reasons a Closed Account Could Impact Credit
While the act of closing a bank account doesn’t directly affect your credit scores, there are some situations when closing a bank account could have a negative impact on your credit.
Charged-Off Debt Sold to Collections
If you close a bank account with an outstanding negative balance (which could happen if you overdrafted the account or got hit with unexpected bank fees), the bank may charge off the debt after a period of non-payment.
A charge-off means the bank has written off a debt because it does not believe it will receive the money that it’s owed. Charged-off debts are often sold to collection agencies, which can then report the unpaid debt to the credit bureaus. If an account in collections is added to your credit report, it can drag down your score and stay on your report for up to seven years.
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Closing an Account Used to Pay a Credit Card or Loan
If you close a checking account that was set up to automatically pay your credit card bill or make a monthly loan payment — without making another arrangement to pay your bills — you could end up missing a payment, which could impact your credit. Since payment history is the biggest element in what makes up your credit scores, going 30 days or more past due can do significant harm to your scores. On top of that, your creditor may slap you with a hefty late fee.
You Want to Apply for A Credit Card or Loan With the Same Bank
For some institutions, having a checking or savings account in good standing could help you get approved for a credit card, mortgage, car loan, or other type of credit, since they already know you and may feel more confident extending you a line of credit. If you close your account, you could potentially lose this advantage.
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Protecting Your Credit When Closing Accounts
To ensure that closing a bank account does not hurt your credit, you’ll want to follow these simple steps when shuttering your account.
1. Open Your New Account
It’s important to have a new checking account in place before you close your old one. This will give you a place to transfer direct deposits and payments or debits. Be sure to take your time and do your research, though. There are a number of factors that go into choosing a new bank, including rates, fees, account offerings, and whether you prefer a traditional brick-and-mortar bank or an online-only bank.
2. Switch Your Recurring Payments and Direct Deposits
Next, you’ll want to make a list of all of the recurring payments and direct deposits you have set up, then move everything to the new account. You can typically change banking information with service providers and creditors online. To avoid having your direct deposit go to a closed bank account, check with your employer to see if there are any forms you need to fill out for direct deposit so your paycheck can be rerouted to your new account.
3. Pay Off Any Outstanding Balances
Don’t close that old account just yet — you’ll want to first pay off any outstanding balances, including any overdrafts or fees you owe the bank. Clearing a negative balance will prevent the bank from taking further action to recover the funds, which could negatively impact your credit. You’ll also want to leave some cash in your old account to cover any pending transactions you might have overlooked.
4. Close Your Old Account
Once you’re sure that any automatic bill payments are now coming from your new account, all direct deposits are going in, and there are no outstanding checks, you can transfer any leftover money to your new account and close your old account. Depending on the bank, you might be able to do an account closure online, or you may need to mail in a form, visit a branch, or call to close your account.
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When Closing an Account Makes Sense
There are a number of valid reasons to close a bank account. Here are a few scenarios where closing an account might be the right decision.
Moving
If you are moving to a new location, especially if it’s far from your current bank, closing your account and opening a new one that has more conveniently located branches could make sense. Some brick-and-mortar banks operate regionally and once you move out of the area, you may not have access to branches or in-network ATMs.
High Fees
Banks often charge various fees, including monthly maintenance fees, ATM fees, and overdraft fees. If your current bank charges high fees and you can find a bank with lower or no fees, closing your account and switching to the new bank can save you money in the long run.
Low Interest Rates
If your savings account is earning the average rate, which is 0.45% APY as of October 21, 2024, it can be well worth making the switch to a high-yield savings account, which can pay 3.00% APY or more. Competitive yields on savings accounts are often found at online banks, which don’t incur the cost of maintaining physical branches and can pass along the savings to customers in the form of higher rates.
Poor Service
If you are dissatisfied with the service provided by your bank, such as limited or lackluster customer service, switching to a bank that better meets your needs can improve your banking experience.
Alternative Options Besides Closing
If you are hesitant to close your bank account due to potential complications, here are some alternatives to consider.
Switch to a No-Fee Account
Many banks offer no-fee or low-fee account options. Switching to one of these accounts can help you avoid high fees without the need to close your current account. This can be particularly useful if you want to maintain a long-term banking relationship.
Negotiate Fees
Sometimes, banks are willing to waive certain fees or offer fee reductions if you ask. Contact your bank’s customer service department to discuss your concerns and see if you can negotiate better terms. Banks typically value customer loyalty, and they may accommodate your request to retain your business.
Keep It Open but Don’t Let It Go Dormant
If you want to keep the account open but rarely use it, you’ll want to be sure to maintain some activity to avoid letting it go dormant. When an account has been inactive for an extended period, it can become the unclaimed property of the state. You can avoid this problem by occasionally withdrawing or depositing cash into the account, periodically using your debit card to make small purchases, or signing up for one auto payment (just make sure to keep a high enough balance to cover it).
The Takeaway
Closing a bank account does not directly affect your credit score, as checking and savings accounts are not reported to credit bureaus. However, if you close an account with unresolved issues, such as outstanding balances, overdraft fees, or unpaid checks, it can lead to negative marks on your credit report if the debt is sent to collections.
By understanding the potential impacts of closing a bank account and taking proactive steps, you can close a bank account and seamlessly begin using your new account without any negative impact on your credit.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
Can I reopen a closed bank account?
It depends on the bank’s policies and the reason for closure. If the account was closed recently and in good standing, you may be able to reopen the account by contacting customer service. However, if the account was closed by the bank due to issues like overdrafts or fraud, reopening might not be possible.
How long does a closed account stay on my record?
While a closed loan or credit card account can stay on your credit reports for up to 10 years, a closed bank account won’t show up on your credit report. However, If you close a bank account with a negative balance and don’t pay the debt in a timely fashion, the bank may send your debt to a collections agency. The agency can then report the collections account to the consumer credit bureaus. A collection account can stay on your credit reports for up to seven years.
Will my credit score increase when I close unused accounts?
Closing unused credit accounts doesn’t necessarily build your credit score and can sometimes lower it. This is because closing accounts reduces your overall available credit, which can increase your credit utilization ratio, a key factor in credit scoring. Additionally, it might shorten your credit history, another important scoring factor.
Instead of closing unused credit accounts, consider keeping them open with minimal or no activity. This maintains your available credit and supports a lower credit utilization ratio, which can build your credit score.
Photo credit: iStock/Drazen Zigic
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
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