Credit scores help lenders assess the likelihood a borrower will repay their debt on time. So, the higher your score, the better your chances of getting approved for loans, credit products, and even leases.
Many factors can affect your credit scores, including your credit accounts, like credit cards, car loans, and personal loans. But what about bank accounts? Does closing a bank account affect your credit score?
Key Points
- Closing a bank account doesn’t have a direct effect on your credit score.
- If your account has a negative balance and your bank sends this debt to collections, your credit score could be negatively affected.
- If your account is not in good standing, you’ll need to bring your balance up to zero before you close it, as well as to avoid a negative effect on your credit score.
Does Closing A Bank Account Affect Your Credit Score In Canada?
There are many factors that can affect your credit score, but is closing a bank account one of them? The answer depends on whether your account is in good standing or not when you close it.
Account In Good Standing
While many lenders may check your bank statements, your bank activity does not have any impact on your credit score. Similarly, closing a bank account doesn’t have any effect on your credit score if your account is in good standing when you close it.
An account in ‘good standing’ is one that has a positive balance and is free of any overdrafts.
Account In Bad Standing
If your bank account is not in good standing, it could negatively affect your credit score. For example, if your bank account is in overdraft and you do not bring your balance from negative to positive territory, you’ll technically owe your bank money.
If you don’t repay what you owe, at some point your bank may sell the amount you owe to a collection agency. If you have an account in collections, it will show up on your credit report which could hurt your credit scores.
What Happens If Your Bank Sells Your Debt To A Collection Agency?
If your debt winds up in collections, this information could end up on your credit report. Collections will remain on your credit report for 6 to 7 years from the date of your first delinquency, depending on the credit bureau.
Before you close your bank account, make sure that it’s not in arrears and you don’t owe the money. If you do, make sure to clear these issues up beforehand.
Closing Bank Accounts Vs. Closing Credit Card Accounts
How does closing a credit card differ from closing a bank account in terms of how they affect your credit score?
Closing Credit Card Accounts
Your credit history is altered when you close an old credit card account, which is a common factor used to calculate credit scores. When you cancel a credit card account, the length or age of your credit accounts may decrease, particularly if it’s an old account.
A lengthier credit history is a good thing for your credit health. That’s because it shows lenders how you’ve handled debt in the past. So, when you close an old account (especially if it’s in good standing), it can shorten your credit history and negatively affect your credit score.
Closing Bank Accounts
Bank accounts, on the other hand, work a lot like utility bills, where information isn’t reported to the credit bureaus unless the accounts are in bad standing. While the act of closing a bank account doesn’t affect your credit score, it can be problematic if you still owe money on the account and your debt is sent to collections.
What Factors Can Affect Your Credit Score?
Several factors can affect the calculation of your credit score:
Payment History
Your payment history accounts for roughly 35% of your credit score calculation, depending on the credit scoring model used. Given that this usually accounts for a little more than a third of your credit scores, payments can have a significant impact on your credit health.
That’s why it’s so important to make sure that all of your debt payments are made on time and in full every month. If you consistently miss debt payments or are late paying them, your credit scores may suffer.
Debt-To-Credit Ratio
The debt-to-credit ratio refers to the amount of revolving credit you’ve used versus the credit limit. It generally accounts for 30% of your credit score calculation.
You can calculate your debt-to-credit ratio by adding all your credit balances and then dividing the sum by your total credit limits. In general, most lenders like to see a ratio of 30% or below, as higher ratios may signal you’re a riskier borrower who may have trouble repaying debt.
Credit Inquiries
The number of loans you’ve applied for within a period of time can also affect your credit. When you apply for new credit products, creditors will pull your credit report to see your credit history and assess what type of borrower you would make. This is known as a ‘hard inquiry’.
Such inquiries may impact your credit score, especially if you have multiple credit inquiries over a short period of time.
Credit History
Your credit history accounts for approximately 15% of your credit score calculation. While closing a credit card account may not shorten your credit history, it can impact the age of your credit accounts, which may affect your credit.
Generally speaking, the older your credit accounts, the better for your credit score. Cancelling a credit card can also impact your debt-to-credit ratio, as your available credit will reduce.
Public Records
Public records can stay on your credit report for up to 7 to 10 years, depending on the remark. This includes things like bankruptcy, consumer proposals, lawsuits, accounts in collections and other derogatory remarks.
How To Close Or Switch Bank Accounts
Closing or switching bank accounts is a pretty straightforward process and generally involves the following steps:
Step 1: Choose A New Bank Account
Your first step should be to find a new bank account that meets your needs. Depending on why you want to close your current account, look for new accounts that offer lower monthly fees and better interest rates. Once you find the right one, typically you can open an account either in person, over the phone, or online.
Step 2: Bring Your Account to Good Standing (If Applicable)
If you currently have a negative balance, you’ll need to bring your account back up to good standing first before closing your account.
Step 3: Transfer Your Money
Next, you should transfer your money into your new account. Otherwise, you may want to withdraw your funds and redeposit them into your new account.
Step 4: Change Automatic Payments And Direct Deposits
Make sure you change any automatic payments and direct deposits to your new bank account before you close your old one. This will likely be the most complicated part of switching accounts, as you’ll want to make sure that you have enough money in the right account to cover your monthly bills.
Be sure to provide all relevant entities, such as your utility providers or employer, with your new bank account information so they know where to draw your bill payments or deposit paycheques.
Step 5: Close Your Old Account
Once you’ve switched over your bill payments and any direct deposits, you can go ahead and close your account. Make sure to get written confirmation that the account has been officially closed, whether by email or regular mail.
Step 6: Pay Any Fees
Your current bank may charge you a small fee to transfer your money, especially if you are transferring your money to a different bank. Fees vary, so ask your bank before you decide to switch accounts.
Final Thoughts
Although closing a bank account may not necessarily hurt your credit score, there are many other factors that will. Be sure to understand how your credit score can be impacted by your actions and habits, and be diligent about keeping your credit score in good shape.
