Does Closing a Checking Account Lower Credit?

When you establish a checking account, you are loaning your deposit money to the financial institution that houses the account. Since your are not the recipient of credit in a checking account relationship, credit reporting agencies do not keep records of the account or the fact that you closed it. However, if a financial institution closes your account when the account has a negative balance, it may impact your credit score.

Credit Scores

Credit scores are a record of your credit history. The different types of credit you borrow, your payment habits and levels of debt are all factored into your credit scores. Timely payments and low levels of credit utilization improve your score whilst frequent credit inquiries and late payments lower your score. Other important credit score factors are the average length of credit history and delinquent accounts. Nonredit debts such as tax liens and charged-off checking accounts are often reported to credit bureaus and these events negatively impact your credit score.

Closing A Checking Account

When you choose to close a checking account with a positive balance, the financial institution disburses money held in the account to you. If you overdraw your account, your financial institution normally close it if it remains negative for more than 60 days. Having closed the account, the financial institution charges it off as an unpaid debt and gives your information to either an internal collections unit or an external collection agency. Generally, these collection agencies either report charged-off debts to the credit bureaus or to ChexSystems.

ChexSystems

Chexsystems Inc. provides information to banks about individuals attempting to open new accounts. ChexSystems receives consumer reports from banks that detail charged-off accounts, fraud activity and other instances of account abuse. ChexSystems creates files detailing the account history of individuals and sells this information to other banks. Banks can choose to use information provided by ChexSystems as a reason for refusing to open a bank account for a new customer. ChexSystems reports are a type of consumer report regulated under the terms of the Fair Credit Reporting Act but ChexSystems does not provide consumer credit reports.

Other Considerations

When you decide to close a checking account, you end your account history with that particular institution and while that does not hurt your credit score, it can make it more difficult for you to obtain a loan from that institution. Many banks provide preferential rates on home loans, car loans and other credit products to consumers who already have established checking accounts with the bank. Most lenders require all borrowers to have a checking account somewhere before writing a loan. Keeping a checking account open can therefore make borrowing cheaper and easier.