Does Closing A Bank Account Affect Your Credit Score?

Does Closing A Bank Account Affect Your Credit Score

There could be many reasons why you may wish to close a bank account which may include changing a bank, combining accounts or an account may remain dormant. This leads to the question – does closing your bank account affect your credit score? The short answer is usually no, closing your bank account has no direct negative effect on your credit score and is not reported to credit bureaus.

With that said, however, there are a few things to bear in mind when closing accounts that may have an impact on your credit in the long run. Now, let’s take a look at some of these in a little more detail.

On the other hand, credit scores indicate the ability of a borrower to repay the loan and they are calculated using the following components.

To be able to see how this can affect your credit, there is a need to understand the composition of the credit score in the first place. Credit scores vary between 300 and 850, and the most widely used are known as FICO Scores. Several factors influence this score, including.

• Credit history – timely payment of bills. This contributes to your score and forms a good percentage of it.
• The total amount used – the total amount of credit that you are currently using from all your accounts.
• Credit utilization – the amount of credit used from all of your accounts.
• New credit applications - the number of new accounts that were opened is also an essential parameter, as many new accounts mean high risk.

Therefore, the only two parameters, that may change in the process of an account closure, are the length of the credit history and the utilization ratio. Let's explore why.

Length of Credit History

If it is one of the oldest credit cards or loans that you still have active, closing it reduces the overall length of your credit history. This is because when you close an account, it will not be included in the computation of this part of the score in the future.

However, for the majority of individuals, closing their oldest account will not be a disaster as long as they have little credit history at all. Provided one still has other open accounts that have been managed creditably for many years, it should not be very significant.

However, a person with little over a year of credit history on all accounts who will close his/her oldest line of credit may see a greater decline in the short term. However, it is encouraging to note that scores can bounce back within several months provided other good information is on the reports.

Credit Utilization

Closing an account also reduces your total overall credit limit, including the credit limit on your cards and loans. This implies that your utilization on remaining accounts may go high because you have lesser opened credit compared to balances carried.

This is the case since higher ratios mean that the borrowers are exposed to more risk for lenders, and your scores will therefore be affected. In a nutshell, the rule of thumb is that the average credit utilization across all credit cards should be below 30%.

The main reason that this ratio increases, is that people just transfer the balances that they were carrying forward to a new account or an existing one.

Therefore, if you decide to shut an account with a credit line that has not been used, your utilization is not impacted in any way. However, if you decide to close an account that is active and has numerous balances, then these balances are transferred somewhere else and your ratios will be higher since you have less open credit. The result over time may lead to lower scores if your report shows high utilization month to month on remaining accounts.

It may therefore not have any direct effect on credit reports.

It is important to state again that the mere closure of a savings, checking, CD, or other deposit account does not reach the consumer credit reporting agencies. These are not credit lines – they are simple accounts that have limited use within each transaction.

Therefore, as you will learn, there is no direct impact at all on your credit report when for example you close your bank checking account unlike when you close a credit card or a loan account.

The actual account closure will not be reflected on your credit reports with Equifax, TransUnion, or Experian unless that bank account was tied to an existing loan product such as an overdraft line of credit or an associated credit card. In those cases, closing the bank account would directly affect the accessibility of those associated credit products.

With that general outlook, let’s now move and see some of the ways to reduce risks when closing the account.

How to reduce the effects of closing an account?

If you want to close an account with minimal impact on credit, consider this advice.

Review Open Credit Lines

List down all current active credit card and loan accounts. Always ensure that you will have enough credit limits available before you go around closing any accounts. To reiterate, closing presumably inactive accounts does not have much impact on the score while closing a stretched or maxed-out credit account can negatively impact your score.

This means that this account should not be closed as it has historical value and is associated with financial gains.

To maximize your ability to borrow money, try to keep your very oldest credit accounts active even if you rarely use them. If you have several old accounts, closing the newest helps keep the older history intact.

Pay Down Rising Balances

If closing an account implies moving balances around to bring about increased usage, ensure that the above are brought down as much as possible. It is worse to have high revolving balances than to have the account closed.

Give it Time

Keep in mind that the adverse effects of account closures on scores are not permanent, and they usually decrease after several months if users remain creditworthy. It is more dynamic and usually recovers when shifts are secured.

The Bottom Line

Closing most of the regular bank accounts such as checking and savings accounts do not have any direct credit repercussions, however, a few key downstream changes may happen when closing credit accounts if not properly dealt with. There is also a need to be particularly sensitive to the total credit limit and other active revolving credit balances.

In both of these realms, try not to make any abrupt shifts, and while a closed account should negatively affect your credit scores, it should not do so severely. Just as the title suggests, most of the time for those with established and positive histories, the dip is quite small and short-lived.

Of course being selective when it comes to ‘culling’ accounts when able is sound, and also remember your score is built to be stable – particularly for those who have a good track record of handling credit over time.

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