Does Closing A Checking Account Affect Credit Score?
Does Closing A Checking Account Affect Your Credit Score
Introduction A Checking account is the place where you deposit your paycheck, pay your bills, and make all your day-to-day transactions. It is part of your economic activity. But what happens if you decide to close it? In particular, is it true that closing your checking account is bad for your credit report?
There's good news. In specific, a checking account does not impact the credit score whether it is kept open or closed. But depending on why and how you close your checking account, indirectly it could be damaging to your credit score. Before you proceed to close your bank account, read along to understand how it may impact your total financial standing and credit profile.
Background on Credit Scores First, knowledge of what is included in the credit score and how this score is computed is essential. Credit scores are numerical representations of your creditworthiness, and the most common scale is the FICO score which ranges between 300 and 850. The higher the number you get, the better. While several factors determine your score, the three main components are.
- Payment history: Did you remember to timelyly pay your bills? Delays show themselves here and lower your score. That comes to thirty-five percent of your total.
- Utilizing credit: ratio The ratio of your credit card company debt to the credit amount made available to you is known as credit use. Here you desire a smaller ratio; so, the lower it is, the better. Thirty percent of this is this component.
- Credit historical length: For what period have you been utilizing credit accounts? Generally speaking, you should keep accounts open for more time; your score will rise. That accounts for fifteen percent of your score.
Other factors include the number of accounts you have opened recently, the kinds of credit you have and the amount of credit you are allowed to use all contribute to the credit score and three of them are as follows: Credit histories are not reported to checking accounts; therefore, opening or closing a checking account will not affect your credit score. However, there are certain checking account issues that can negatively affect your score though you cannot see this on the surface.
Pending Fees or Overdrafts
In case you decide to shut down a checking account that has a negative balance or overdraft or monthly maintenance fees, the overdraft or the fees will not disappear. The bank can report the delinquent account to ChexSystems which is essentially the checking account version of a credit bureau. When one has a ChexSystems record, he or she lacks the freedom to open other checking accounts in most standard banks.
What does this have to do with your credit? Lack of a checking account implies you might have to use costly check cashing services or pay your bills using money orders. This lack of access to traditional banking is associated with lower credit scores. Studies have found that consumers who lack bank accounts have below 600 credit scores which is regarded as poor credit. The average credit score of the people living in the United States is, however, above 700. Fewer banking facilities also affect how you handle your cash and meet your dues on time a part of credit score calculation.
Credit Inquiries/New Accounts: This may include any inquiries related to credit or new accounts that may have been made on the credit report within the specific period mentioned in the credit report.
You might also require the opening of a fresh checking account when you have closed one, say if it was your single account. So when applying for a checking account, you can compare this to applying for credit, where the bank needs to pull your credit history. When multiple credit inquiries are made within a short time, it is interpreted as higher risk by the lenders and therefore your score may decline by a few points.
Further, the creation of a new checking account increases your total accounts and therefore decreases the average credit history age which contributes to fifteen percent of the credit score. If you begin with no credit history at all, a credit new checking account will reduce the length of your credit history slightly and lower it.
Cob Building Credit History
At the same time, an active checking account opens opportunities to prove that you can manage your funds properly, pay your bills on time, and gradually improve your credit history. Here are two ways:
The savings and checking accounts are linked.
Some of the banks enable you to transfer money from your savings account to a checking account and vice versa. In case of an overdraft in a checking account, money gets transferred from a savings account without needing any effort. It is possible that instead of getting charged a hefty overdraft fee, you end up paying a considerably less amount for a savings account transfer. This saves you from paying bills at the wrong time or any other problem that goes against your credit score.
Secured Credit Cards
Most issuers require an established banking relationship and stable income deposits for one to be issued with an unsecured credit card. After accumulating a good string of transaction records such as timely rent, utility, or other checking payments, banks may consider extending your credit limit to a starter credit card. A secured card linked to a checking account deposit can also be useful for establishing payment history and credit gradually.
Final Thoughts and Measures to Prevent Harm to Credit Score
Of the three ways of closing your checking account, one is preferable when it comes to maintaining your credit score. To avoid any indirect hits, be sure to.
Clear any negative balance or charges before the account's closure. Before closing any checking account, open a new checking account in another bank first It helps transfer auto-pay bills to the new account to ensure one's bills are not paid late. Ensure that the remaining transactions are complete before requesting closure It is only safe to close accounts that have been opened for a few years at most.
Adhering to these tips ensures that the changeover does not cause any credit blips or hitches.
The Takeaway
In most cases, the process of closing a checking account does not directly affect your credit score. One important thing about checking accounts is that they do not get reported to the three major credit bureaus. However, how and why you close your account could indirectly affect your credit down the road in a few scenarios.
Outstanding fees or balances as well as an overdrawn account will report a bad banking history to ChexSystems making it very difficult to apply for a new account. This is because exclusion from conventional banking is associated with lower credit. New checking accounts lead to too many credit inquiries which are detrimental to your score. It reduces the average length of credit history when opening additional accounts.
On the positive side, the existence of a checking account offers chances of exercising good management of the cash. You can link different accounts for overdraft protection and for getting starter credit cards to establish payment history.
First and foremost, it is crucial to understand that how closing your checking account impacts your credit score is, in fact, dependent on how you manage that change. Thus, being wise with time and not applying for too many new accounts will not cause any indirect harm to the credit score.
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