Credit scores help lenders judge your creditworthiness or your ability to repay your debts. A credit score is a three-digit number between 300 and 900. The higher your score, the better your credit. Credit scores are important to be approved for a loan at an affordable rate. For example, credit rating is considered when applying for a mortgage, auto loan, personal loan, and even a credit card.
As credit scores are so important, it is important to know what can impact your score to maintain good credit. So what can influence your credit history? More specifically, can closing one of your bank accounts lower your credit rating?
Will closing bank my account affects my credit scores?
Many factors influence credit rating, but is closing a bank account one of them? The answer depends on whether you close your bank account while it is in good standing or not.
If your bank account is in good standing
Although many lenders check your bank statements, your banking activity will not impact your credit score. Similarly, closing your account will not affect your credit score. In other words, if your account is in good standing and you have no negative balance or fees to pay, closing the account will not negatively affect your rating.
If your bank account is not in good standing
If your bank account is not in good standing, closing it could negatively affect your rating. For example, if you have an overdraft or you haven’t repaid your debt by the due date, the bank may send your debt to a collection agency, thereby lowering your credit score.
What happens if the bank sends your debt to a collection agency?
If the bank sends your debt to a collection agency, the transaction will appear on your credit report and remain there for seven years. So when a collection agency sees your debt, your credit rating suffers. If you decide to close a bank account, make sure you don’t owe anything.
Closing your bank or credit account
Closing an old credit card can affect your score because it’s one of the factors that credit bureaus used in calculating your credit score. The average length of your credit accounts decreases when you cancel a credit card, especially if you’ve had the card for a long time. A shorter credit history negatively affects your rating.
Also, lenders usually prefer borrowers with a long credit history because they can better understand how the person has handled their debt in the past. (See also: How To Cancel Your Credit Card Without Hurting Your Score).
However, transactions in your bank accounts are not reported to the credit bureaus unless your account is not in good standing. So simply closing the account won’t affect your rating unless you still owe the bank money and the bank sends your debt to a collection agency.
Why do people close their bank accounts?
Closing an account can be a good idea if you’re moving away from an area where the bank has branches. Or if you no longer need the services provided by that particular bank. For example, suppose you now work for another company in a different city or state. In that case, you can close those old accounts and open new ones with your new employer’s financial institution.
Furthermore, when maintenance fees become too high, you can close your bank accounts. For example, if you have more than one checking account, you can consolidate them into one account to reduce bank maintenance fees.
In conclusion
While closing your bank account does not have a direct effect on your credit score, there are indirect effects. The more accounts that you have open and available to use, the more lenders can rely on you as a responsible borrower.