When you decide to close a bank account, there are several things that you need to keep in mind. One of the most important is how it will affect your credit score. Closing a bank account can hurt your credit score, especially if you have been using that account to establish a good credit history. This blog post will discuss the consequences of closing a bank account and how it can affect your credit score.
What Is A Credit Score?
A credit score is a three-digit number that lenders use to assess your creditworthiness. It is calculated based on information from your credit reports, which include details such as the amount of debt you carry, the length of your credit history, and whether or not you make timely payments. Your score ranges from 300 to 850 — the higher it is, the better your chance of getting approved for loans and other forms of credit. Pending transactions, late payments, and account closures can negatively affect your credit score. Negative balance and overdraft fees can also be reported to the credit bureaus, further lowering your score.
How Does Closing A Bank Account Affect Credit Score?
Closing a bank account can affect your credit score in various ways, depending on the specific circumstances. Generally speaking, closing a checking or savings account won't immediately impact your credit score, but it could lead to other issues down the line. For example, suppose you close an existing account with a positive payment history and years of excellent repayment and balance management. In that case, it could be seen as a sign of potential financial stress by potential lenders in the future.
Additionally, suppose you close an account that still has outstanding debts associated with it. In that case, there's the potential for those late payments to be reported to credit bureaus such as Experian and Equifax, which could damage your score significantly. In short, while closing a bank account may not affect your credit score immediately, it should still be done thoughtfully and carefully, as there could be unintended consequences.
Alternatives To Closing Bank Accounts That May Not Affect Your Credit Score As Much
If you’re concerned about the potential impact closing a bank account may have on your credit score, there are alternatives to consider.
1. Change Banks
Instead of closing an old bank account, you could open an account at a different bank and move your money. In this way, you can keep your original account open without incurring any fees or damage to your credit score. It also gives you access to additional banking services if needed.
2. Transfer Your Funds
You can easily transfer funds from one bank account to another by using online banking tools such as electronic transfers or direct deposits. This way, you can keep both accounts active yet maintain control over where your outstanding balance is allocated.
3. Suspend Your Account
You can also suspend your account for some time, allowing you to keep the overall relationship with the bank active. This way, you won’t incur any fees or damage your credit score, and you can still access the bank’s services when needed.
These alternatives may be more suitable than closing an account if you’re worried about affecting your credit score. Ultimately, financial institutions can report closed accounts to credit bureaus, which could affect your score.
Tips For Improving Your Credit Score Over Time
Here are some tips for improving your credit score over time:
1. Pay Your Bills On Time
Late payments can have a major impact on your credit score. Make sure that you pay each of your bills by the due date set by the creditor.
2. Reduce Your Credit Card Debt
Credit card debt can really hurt your credit score, so try to make payments as much as possible and reduce your overall credit card interest. This will help improve your score over time.
3. Monitor For Fraudulent Activity
Fraudulent activity can have a big impact on your credit score, so it’s important to check in regularly and monitor any changes to ensure that everything is accurate and up-to-date regarding accounts associated with you.
4. Avoid Applying For Too Many Credit Cards
Many people think applying for many credit cards is a good way to improve their credit score, but this isn’t true. Too many hard inquiries can hurt your score, so limit the number of new accounts you open.
5. Keep Old Accounts Open
Closing an old account may seem like it would help your credit score, but keeping these older accounts open and active can benefit your overall score.
6. Dispute Any Errors On Your Credit Report
Credit bureaus are not perfect and do make mistakes from time to time. If you spot any errors on your report, dispute them as soon as possible with the credit bureau to ensure that your score accurately reflects your financial history.
7. Avoid Taking Out Too Many Loans
Taking out too many loans in a short period can cause a big dent in your credit score. Try to limit the number of new loan applications you submit and focus on paying off existing ones before applying for more.
8. Use Credit Cards Responsibly
Credit cards are great ways to build up your credit score, but using them responsibly is important. Make sure you pay the balance off each month, and don’t spend more than you can afford. This will help improve your overall credit score over time.
Final Words
Improving your credit score takes time and effort, but it is possible. With the right strategies in place, you can make sure that your score reflects your true financial picture and get access to better interest rates or loan terms when needed. Bank account activity can be a major factor in your credit score, so consider the alternatives before closing an account. Checking account activity can positively or negatively affect your credit score, so be sure to keep it in mind when making any big financial decisions. By following these tips, you’ll soon be able to enjoy the benefits of having an excellent credit rating.
If you would like more information about how to increase your credit score, reach out to a money coach here at Bolder. We can help guide you through any questions you may have and get you set up on the path to financial success.
