Does Closing Bank Account Affect Credit Score?

Closing a Bank Account: How Does It Impact Your Credit Score?

CA credit score is a three-digit number that potential creditors use to get an insight into your believability of repaying the borrowed amount. It means that the higher the credit score is, the more trustworthy you appear to potential lenders. CA credit score is derived from the details found in the credit report, which contains information on how you have been repaying loans. Any individual with credit cards or loans understands that defaulting on payments leads to the lowering of credit scores. But what do you have to do with the bank account? Can that also influence the credit ratings? As stated again, here is more information on how closing a checking or savings account could impact credit:

How Credit Score Is Determined?

As much as it is essential to know if closing a bank account affects your credit, it is crucial to know what contributes to your credit score. The best-known credit score is FICO, and it ranges between 300 and 850. According to myFICO, the breakdown of what impacts your FICO score is.

• Payment History: 35%
• Amounts of Debt Owed: The comparison of the two groups was consistent with the hypotheses as the experimental group was found to be 30% less likely to use drugs.
• Length of Credit History: 15 percent
• New Credit Applications: 10%
• Credit Mix: 10%

The largest is your history of payments whether you have paid loans and credit cards on time in the past. The other factors affecting the score are the amounts owed, the length of credit history, new credit applications, and the credit mix. What do you feel is missing from this list? Bank accounts. Now let us discuss why that is.

Bank accounts are not reported to credit referencing agencies and are therefore not widely considered as part of the credit report.

Reports contain data on credit cards, auto loans, student loans, and mortgage loans the kinds of credit that institutions report. This ranges from the amount that has been borrowed and how repayment is made. It should be noted that your checking and savings accounts are not reported to credit bureaus. Because credit reports contain the data that is used to determine credit scores, checking and savings accounts are not involved.

It is also important to note that closing a checking or savings account does not impact the credit score in any way because it will not reflect on the credit report. However, if you are not aware of overdraft coverage linked to that account and consider it a loan, closing an account will not be reported to or reflected in the credit reports developed by the three credit bureaus.

An exception Overdraft coverage

As pointed out earlier, one of the few scenarios where you might not be penalized for overdraft is if you have overdraft protection on your checking account. Overdraft enables you to expend more money than what is in your account to the amount that the bank will permit and the bank will pay for the overdraft for a fee. This essentially acts like a short-term overdraft from the bank. At times, these banks will be able to report this as a loan to agencies in credit reporting, though this could slightly boost your credit utilization if you always pay it as agreed.

However, overdraft coverage is not usually reported to credit bureaus by many banks to protect their clients. Additionally, on consumer credit reports, overdraft coverage is often reported as not having any influence or a minimal one on credit scores. But, most importantly, it probably will not negatively affect your credit score if reported. Therefore, withdrawing overdraft coverage when an account is being shut is improbable to alter the aspects that are reported to credit bureaus or reporting businesses.

When Closing Accounts Might Harm Credit Indirectly

While closing a bank account does not directly impact your credit report, there are a couple of indirect ways it could over time alter your credit score.

1. Closing your oldest account - As tempting as it may be, closing accounts that are old and unused, your length of credit history, and your oldest account age contribute 15% of your FICO score. Therefore, closing your oldest active account reduces your credit history and may slightly lower your credit score.
2. Lowering credit limit - One factor that your score takes into consideration is the ratio between the amount of credit you've used and the total amount of credit available to you. This should not be affected by closing a savings account. However, a checking account can sometimes carry an overdraft line of credit that needs to be considered when calculating available credit. If you had other revolving accounts, closing your checking account to eliminate an overdraft line could raise your credit utilization ratio and, consequently, your credit score.

In most cases though, closing your oldest bank account will not take a toll on your credit score as long as you have other long-standing accounts. For instance, if you recently shut a checking account that was used by a 55-year-old but you still have three credit cards that are more than 10 years old, the effects are not very much felt. If you do not have any balances on the other cards, the loss of an overdraft line should not affect your utilization ratio.

Other considerations that one needs to make before closing an account include:

While credit score impact is generally not a top concern when closing a bank account, there are some other considerations.

• Ongoing payments - In case the account has any payments that are made regularly such as subscription services, loans, insurance, and other services, ensure that you change your details with the business in question after closing down the account. It may sometimes lead to missing payments when you forget to update your biller; therefore, impacting your credit.
• Outstanding balances - Ensure that all the checks, transactions, and automated payments have been processed out of your account before closing it. Any balance that may be remaining on the account may affect your credit in case of an unpaid balance that is reported against you.
• Length of credit history - as mentioned earlier, having the oldest accounts active maintains this parameter of credit history's history. Another option if you do not wish to retain the account but do not want the bank to freeze it, is to request the bank to convert inactive accounts to closed accounts.

The Bottom Line

Normally, if you close your checking or savings account, it will not be reflected in your credit report or affect your score. So long as one does not carry the overdraft balance or the oldest bank account to show the length of credit history, closing off a credit account that is not necessary should not cause any harm. As long as you do not want to leave any undue bills unpaid, you just need to ensure that any due payments are regularly cleared before the closure becomes operational.

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