Closing a bank account doesn’t affect your credit score directly. However, there are certain situations where a bank account closure can potentially damage your credit score.
- Closing a bank account in good standing doesn’t affect your credit score negatively.
- Paying off all debts on time and avoiding late payments is healthy for your credit score.
- Avoiding a high balance and higher credit utilization ratio can help you potentially increase your credit score.
Bank Account Closure And Its Impact On Credit Score
A credit score is a numerical expression that represents a person’s creditworthiness based on factors such as repayment history, debt levels, and number of accounts. It ranges from 300 to 850, with a higher score indicating a lower risk borrower.
In most cases, closing a bank account doesn’t affect your credit score. However, it can potentially damage your score for several reasons.
- Hard inquiry: It appears on your credit report and can negatively affect your score. A hard inquiry occurs when a creditor or lender requests a copy of your credit report to determine how much risk you pose as a borrower. Hard inquiries also indicate that a person has applied for a new line of loan or credit, indicating that the person is a high-risk borrower.
- Credit utilization ratio: If you use your credit aggressively, your credit utilization ratio (Credit Card Balance ÷ Credit Limit × 100) will rise quickly. It’s the amount of credit used (by the borrower) compared to the amount of total credit available. It plays a vital role in determining your credit score. In contrast, if you use your credit wisely, then it can help keep your credit utilization ratio in control.
- Age of your credit history: Credit history age defines the length of time you’ve been using credit. A long credit history shows that a person has been managing credit responsibly over a long period. It’s an indication of good credit behavior, which lenders like.
- High balance: If you close a bank account with a high balance, it can lead to a higher credit utilization ratio and cause a dip in your score.
- Overdrafts: If you have a history of overdrafts, closing your account can indicate that you’re unable to manage your finances properly and have a negative impact on your score.
FICO and VantageScore are the two most widely used credit-scoring models in the US. FICO is the more established model and is used by most lenders, while VantageScore is gaining popularity due to its use of alternative data and more forgiving treatment of late payments.
Tips To Maintain A Healthy Credit Score
Consider the following:
- Keep all credit accounts in good standing
- Keep a low utilization ratio with a long credit history; 10% is a good target, but 30% may suffice
- Stick to a budget to avoid overspending
- Pay off credit card balances in full each month to avoid interest charges
- Spread purchases across multiple credit cards to keep balance and utilization ratio under control
How To Close A Bank Account Without Damaging Credit
Here are a few steps you can take to close an account without hurting your credit:
- Check your credit score: Measure your credit score before closing your account and note where you’re standing. This will help you draw comparisons once your account is closed.
- Pay off all debts: Pay off all outstanding debts before closing your account. This will surely help you avoid any negative impact on your score when you close a bank account.
- Update automatic billing: If your account is linked to automatic billing, it’s important to update these details to avoid late payments and any charges or penalties caused by late payments.
- Communicate with the bank: Contact your bank and let them know you want to close your account. Make sure you don’t have any outstanding balances and provide the bank with all the necessary information they might need to close your account.
- Keep the account open: If you have had this account for a long period, and with a positive history, consider keeping it open for a while. You can either keep it open with a minimum balance or in a dormant state. By doing this, you can increase the length of your credit history and reduce or eliminate any negative impacts on your credit score.
- Request the final statement: Ask your bank to provide you with a final bank statement that reflects any outstanding balances and debts. Also, ask the bank to provide you with a written confirmation with a $0 balance before closing your account.
- Monitor your credit report: Once your account is closed, check your credit reports to ensure they show your account as closed. Check the date and balance and make sure there are no inaccuracies in reporting your account.
When you close your account, you won’t be able to use the rewards with that account. But the good news is, you can use these rewards as a statement credit, which can improve your credit score.
Looking for a provider for a new bank account? Check out our guide on the best high-yield savings accounts.