Does Closing A Bank Account Affect Credit Score?

Introduction It is important to note that your bank account and your credit score are two different things even though they are linked. Your bank account consists of your records with your bank or credit union and describes how you allocate and spend money. A credit score is a number ranging from 300 to 850, which is determined by credit bureaus and shows lenders how good you are at paying the borrowed amount. As these two things are different, does one influence the other? Particularly, when you decide to shut down a bank account, does it have any implications for your credit score? Okay, let us consider this in detail.

How credit scores are calculated Before getting to the question of whether it does matter to close accounts, let us define what goes into a credit score. The two main types of credit scores are FICO scores and VantageScore. While the formulas differ slightly, some major factors shape these scores.

• Payment history- records if one can make timely payments for the bills. Contributing to about one-third of a FICO score.
• Credit utilization – Determines the extent to which you are using your line of credit. FICO scores are about 30% comprised of civil records, criminal records, or any records of prior offenses.
• Credit history length –Credit history shows how long the borrower has been using credit. Even a 15% FICO score is still valid.
• New credit – Refers to the amount of money that has been borrowed in the recent past and the number of credit inquiries. Approximately 10 percent of one’s FICO score.
• Credit mix – Analyzes various credit accounts such as mortgages, credit cards, and student loans, among others This constitutes roughly 10% of the FICO score.
• As you can observe, these scores are solely about your credit – there is nothing about checking or savings accounts or any other credit product. In general, closing a bank account should not cause significant changes in credit scores as long as proper credit behavior is maintained.

Why It Is Important to Understand That Closing An Account Might Hurt Your Credit While credit scores do not consider having a banking account as a factor, closing an account could affect your scores in some scenarios. Here are some examples:

• You can even close a secured credit card account – These are credit cards that come with a cash security deposit equivalent to your credit limit. If you shut this account, the bank will return your deposit but at the same time, they will cancel your credit card. Reduction of a credit card reduces the total limit of credit available to you which in turn increases the credit utilization ratio that is the formula used in credit scores.
• You decrease your average age of accounts - This occurs if the account you closed is one of the oldest credit accounts that you have opened. As 15% of your FICO score looks at your credit history, closing one of your longest active accounts will harm your scores.
• There is a mistake in reporting – When an account shows up as “closed” on your credit reports then it means you closed it or the bank closed it due to inactivity or overdrafting the account. But if it is the latter scenario that gets classified under the “closed by consumer” option, it gives a perception that you have handled the account poorly.
• You close multiple accounts quickly – Closing several accounts within a relatively short time is likely to be perceived as risky even if the closures are handled well.

For the most part, anyone who is closing their oldest bank account or credit card is bound to see their credit rating dropping a notch or two. But if the other accounts have a long positive credit history, and the balances are low on those accounts, the consequence should not last long and should not be severe. It is always wise to monitor your credit reports especially when closing financial accounts, this will help to check on the reports being given out.

Ways to reduce credit score effects If you have decided an old bank account no longer fits your needs, there are some steps to take that can minimize any potential credit score damage.

• The advice is to not shut the oldest of your accounts – This means that if you can afford to keep it open, you should not close their oldest credit card or bank account. This extended history proves beneficial to your credit scores.
• Pay off card balances first – Before closing a credit card, pay off balances on the remaining cards to under 30% of credit limits to avoid rising utilization.
• Open a new card first – before you close a credit card that you’ve had for many years, you should open a new credit card. This increases your overall credit limit and also indicates activity on the account.
• Let closed accounts age – Any changes from closing an account reduce affecting your scores in your credit report and to a small degree over time. It takes up to 6 months to a year for the scores to recover once you start exercising good credit habits.
• Monitor your credit reports - After one month, obtain copies of your credit reports from the three credit bureaus and ensure that your closed account is marked correctly. Dispute any errors rapidly.

The Bottom Line Bank accounts and credit scores are somewhat related or linked in a way but are not the same. In this case, you might see a minor impact on your credit scores for a short period when you decide to close a long-used bank account or credit card. Still, provided that you keep to sound financial practices and check your credit reports from time to time, any consequences should be mild and temporary only. Maintaining a healthy financial status by paying all your bills on time, having low credit card utilization rates, and reviewing your credit reports once each year is the only way to build and maintain your scores. Thus, if closing an unused bank account can have some effect, it is much more important to continue maintaining good credit practices later on for an impact on your scores.

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