Does Closing A Bank Account Affect My Credit Score?

Is closing a bank account good or bad for your credit score or does it have no bearing on your credit score?

One common question that may cross your mind is whether closing your bank account will affect your credit score in any way. This is a relevant factor if you have several accounts and wish to merge one or several of them, or if you do not employ a definite account anymore. Continue reading to learn how account closure might have an impact on credit if it did or did not.

How credit scores are calculated?

It will be informative to know how your credit score is computed before raising the question of whether or not closing an account will impact it and, if so, how. The FICO model is the most commonly used credit scoring model. FICO scores fall between 300 and 850. The more it is on the right side, the better it is for the company when financing is required from other sources.

FICO considers five main categories when computing your score.

Bills payment – Are you capable of paying your bills as soon as they are due? This category has the highest importance or weightage of all. Credit utilization ratio – how much of your total available credit are you using? The opposite is true, the lower your utilization the better. Credit utilization - Do you still have credit cards that have not been used by you for years? The more historical experience, the better. Credit type – Have you ever had credit cards or any other type of credit such as personal or car loans? Diversity helps your score. New credit – Applying for new credit – this factor is as simple as getting new credit cards or opening many accounts within a short duration.

Of course, now, when you have insights on what does and does not enter into your credit score, you can once again notice that, for example, information regarding the closure of accounts is not used in this calculation. However, account closure could affect your score indirectly in the sense that it changes your credit utilization and the average length of your credit history.

Closing An Account And Credit Utilization

In an ideal world, your credit utilization ratio should be as low as possible. This reveals the extent to which you are utilizing your available credit limits. For instance, for three credit cards, with 1000 limits each, that means you have a total of 3000 available credits. Having a 500 balance each month on the three cards your utilization is 500/3000 or 0. 17.

If you close one or more accounts, that automatically decreases the total amount of credit available to you. For instance, if you shut down two out of the three cards, you are left with only 1000 total available credits. Now, with the same $500 monthly balance, your utilization rate goes up to 50 percent which means your credit score will drop.

The effect on your credit score will vary depending on your circumstances, but closing your oldest credit card or the one with the highest credit limit will result in a larger effect. To minimize the damaging effects of increased utilization, one should pay off balances before closing accounts. It is also possible to negotiate with lenders for lower limits before card closing if the need arises.

How to Close an Account and Credit History?

However, canceling a credit card could also lead to a decrease in the average age of accounts, as well as in the overall utilization rate. This factor calculates how long you could access credit and have been utilizing it. Some of the ways it comes into play include the following Ways:

Shutting your first credit card. Lastly, the length of credit history depends on the oldest credit account you have. This is because if you have many cards, and you close one that you have been using for a long, it will result in the average being pulled down.
This is about reaching your decision and cutting up your most recent credit card. Albeit not as severe as closing the oldest card, canceling your newest account also negatively affects the length of your credit history in the sense that an active account is eliminated.

Most of the time, the effect is moderate, nevertheless, it varies depending on your credit history. To reduce the overall impact on the score, one should not close any credit card accounts if they are less than two years old. If possible, keep your oldest card accounts active even if the card is not frequently used.

Other Ways Closing An Account Can Affect Your Credit

Beyond utilization and length of account history, some other areas closing a bank account could alter your credit include.

Limiting the number of credit accounts – Credit scoring agencies like to see that you are capable of handling different forms of credit apart from credit cards. This can be car loans, mortgages, or student loans among others. If closing a card means that you don’t have an installment loan, it will reduce the diversification of your mix.
Clearing backup cash options – oftentimes, people keep backup cash in a particular credit card that they do not frequently use. Closing accounts decreases this available flexibility. This may have an impact on credit rating in a negative way.
Opening and closing accounts – If you open and close a large number of accounts within a short time, the banks might consider it as risky. Therefore, your credit score may be lowered by risk algorithms that take into consideration the closure of accounts that are considered to be unusual.

Closing an account is not always the best option, especially when there is an indication that a particular account may take a turn for the worse.

As mentioned in the section above, the decision to close credit card and bank accounts may potentially influence credit in various ways, although the impact is generally not significant. However, you should take proactive steps to minimize any potential consequences of canceling an account such as.

This will keep the credit utilization ratio low even if total limits are lowered by closing an account Pay down balances on all accounts first.
Instead of closing an account, you can transfer the credit line of one card to another with the same bank.
Closed accounts should be aged off – Even the accounts that have been closed are good to stay on your credit reports for about 7 to 10 years and accrue a good length of credit history. This means that you will not pay for new closed accounts in perpetuity.

Monitor Credit Regularly

Last but not least; do not lag to check your credit report and credit score from the three major bureaus namely Equifax, Experian, and TransUnion. Several credit cards and personal finance sites provide free updates on the credit score and report. It is recommended that these details are reviewed at least every quarter and any time an account is closed. If, for example, you have noticed that your credit has recently gone down, then you may know that the most likely reason is the recent shutdown of the accounts.

As you can observe, it is very much doable to painfully impact your credit score by canceling your bank accounts and credit cards – but usually just to a certain extent. Here are things you can do to keep your accounts in check by avoiding any negative effects on your score and future financial status as advised in this article. So, diligence and attention to the situation pay off!

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