Are you thinking of closing a bank account and are worried that it could impact your credit? Has the bank notified you of a pending account closure following a breakdown of the relationship?
Credit reporting agencies don’t track the consumer’s pattern of opening and closing bank accounts. Reports only contain records of past and active credit products.
Scoring models such as FICO or VantageScore generate scores from information contained in credit reports. So, if there is no record of the banking activity, there is no effect whatsoever.
Consumers should still be careful as there are instances where closing a bank account can hurt credit. We’ll examine all the scenarios.
Banks have the right to end relationships with customers at any time. They do this if frictions have emerged from the customer’s use of their facilities. One source of friction is when the customer carries a negative balance.
Accounts may fall into the negative if customers have overdraft coverage, which allows the bank to cover pending transactions even if the balance is not sufficient. For instance, the shortfall may exist after the customer writes a check, withdraws cash using a debit card, or makes automatic payments.
Most financial institutions provide an overdraft limit of $100 to $1,000. They charge an overdraft fee that ranges from $10 to $40. If the customer has not deposited money to cover the overdraft after five business days, the bank may charge the extended overdraft fee. They will keep charging the fee after a set duration of non-payment.
Non-sufficient fees can also contribute to a negative balance. They occur when the customer writes a bad check or if automatic payments fail because of insufficient balances.
Does overdrafting hurt your credit? Well, it’s quite easy for the balance to grow to unmanageable levels. If the customer fails to clear their negative balance, the bank will take two key measures:
Before charging off the account, the bank will try all measures to contact the customer. They will make calls and send emails or text messages. They will also continue charging the over-extended overdraft fees.
If they don’t receive any payment within 45 to 60 days, the bank will send a reasonable notice of the intended closure. It may allow for a further 7 to 14 days before they charge off the negative balance.
Charging off means that the bank believes that it will no longer collect on the outstanding debt. However, they don’t write off the balance. Banks simply transfer debts to debt collection agencies or internal collections departments.
One of the top reasons financial institutions hire debt collectors is because they are efficient and offer legal protection. Some have in-house lawyers to help file lawsuits. So, simply ignoring a debt doesn’t make it go away.
Debt collection agencies report delinquent debts to the credit reporting bureaus. But if the debt was wrongly reported, it’s possible to challenge the bureaus directly by filing a dispute by yourself or hiring a credit repair firm.
Collections accounts have a devastating effect on credit scores. A recently reported delinquency can lead to a 100-point drop. Consider clearing the debt as newer versions of scoring algorithms such as Fico Score 9 and VantageScore 3.0 don’t factor in paid collections accounts.
At the present moment, most lenders are using Fico Score 8 that factors both unpaid and paid collections accounts.
Banks will report problems with accounts to ChexSystems. It’s the leading specialty consumer reporting agency that deals with banking activity. Financial institutions may request reports from ChexSystems as part of their background check. They look for incidents where the bank had to forcefully close accounts due to non-payment. As an alternative, customers with tainted histories can consider online banks or credit unions.
There are situations where having an account closed by the bank can hurt scores indirectly:
Financial institutions can close accounts without notice if they are complying with court orders or suspect fraudulent activity. They may also fail to give notice if customers have breached the terms and conditions or abused the staff.
If you’re employed, you likely rely on direct deposits to your checking account. If you didn’t see the closure coming, it might make it hard to access money for expenditure.
There will be delays in sending back the money if your employer already sent it to the closed bank account. They may have to issue a paper check, and this will also cause further delays. You may have to wait for up to 14 business days before receiving your paycheck.
In the meantime, some bills may have gone unpaid. Or you may end up charging your credit cards more than usual. It will inevitably increase your credit utilization rate. A high credit utilization rate of more than 30% hurts scores.
Negative consumer records can make it hard to get approved by other financial institutions, introducing new difficulties. For instance, customers will not have the ability to establish a track record with a financial institution that issues subsidized loans to its customers.
Credit card issuers and other mainstream lenders ask for bank statements as part of the evaluation process. Therefore, staying without an account for an extended period affects the chances of qualifying for new credit.
People without accounts also have to opt for expensive ways to cash checks. They also miss out on setting up automatic payments or writing postdated checks to pay for bills in the future.
If the account has a negative balance, consider settling it and don’t ignore calls about the outstanding bill. Instead, ask to get in touch with someone in authority, such as the manager. Talk to them about your situation and show how you plan to pay off the balance.
Avoid closing a bank account with a negative balance as it takes seven years for the credit reporting bureaus to delete collection entries from your payment history. Most lenders will view collection accounts negatively and may be the basis for denying your loan application.
At the current moment, financial institutions have innovated new ways of helping customers get through the current pandemic. Call the support team and ask about the relief options.
You should not have any difficulties closing a savings account as long as it does not have a negative balance. Just call customer support or do it in person. All the remaining funds may be transferred to another financial institution or withdrawn.
Consumers don’t need any special reason when closing a checking account. You may switch to a competitor because they offer better services, more convenience, or simply as a matter of preference.
Customers should always take an active role in ensuring that they follow all the stipulations of the bank. For instance, if the bank asks for documentation to prove tax compliance, be ready to supply it.
Never let the bank charge off the account as it results in a collections account that remains on credit reports for seven years. Try to stop an account closure that could hurt scores by negotiating with someone in authority.