Credit scores help lenders assess the likelihood a borrower will repay their debt on time. It is a three-digit number between 300 – 900, the higher your score, the more creditworthy you’ll seem to a lender. Credit scores are one important factor that plays a role in getting approved for an affordable loan. Whether it’s a mortgage, auto loan, personal loan, or even a credit card.
Given the importance of credit scores, understanding what affects them, is key to building and maintaining good credit. So what can affect your credit scores? In particular, can closing a bank account hurt your credit scores?
There are many factors that can affect your credit scores, but is closing a bank account one of them? The answer depends on whether you close your bank account while it is in good standing or bad standing.
While many lenders may check your bank statements, your bank activity does not have any impact on your credit scores. Similarly closing a bank account doesn’t have any effect on your credit scores. That is, of course, if your account is in good standing. That means you don’t have any money owing; such as fees and negative balances, when you close your account,
If your bank account is not in good standing it could negatively affect your credit scores. For example, if your bank account is in overdraft and you do not repay the amount owed by the due date, your bank may send the amount you owe to a collection agency, which could affect your credit scores.
If your bank sells your debt to a collections agency it’ll end up on your credit report. This can negatively affect your credit and can remain on your credit report for up to 7 years. Before you decide to close a bank account, make sure that it is not in arrears and you don’t owe the bank or credit union anything. If you do, it’s important that you clear these issues up beforehand.
Closing an old credit card can affect the calculation of your credit scores because it affects your credit history, which is a common factor used to calculate credit scores. The length or age of your credit accounts generally reduces when you cancel a credit card account (particularly if it’s an old account). This could negatively impact the calculation of your credit scores.
Moreover, lenders generally prefer borrowers with a long credit history as it gives them a better idea of how they’ve handled debt in the past.
Bank accounts, on the other hand, work a lot like utility bills where information isn’t reported to the credit bureaus unless it’s in bad standing. While the act of closing a bank account doesn’t affect credit scores, it can if you still owe money on the account and your bank sends your debt to collections.
There are a number of factors that can affect the calculation of your credit scores. From the credit information reported to the credit bureaus to the credit scoring model used, there are numerous factors that can affect your credit scores.
Your payment history generally accounts for 35% of your credit scores but can vary based 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.
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 in full, your credit scores may suffer.
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 scores. 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, higher ratios may signal you’re a risker borrower who may have trouble repaying debt.
The number of loans you’ve applied to within a period of time can also affect your credit. When you apply for new credit products, creditors will pull your credit report in order to see your credit history and accurately assess what type of borrower you would make. Such inquiries may impact your credit scores, especially if you have multiple credit inquiries over a short period of time.
Your credit history accounts for approximately 10% of your credit scores. While closing a credit card does 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 more likely it can help your credit scores. Cancelling a credit card can also impact your debt-to-credit ratio as your available credit will reduce.
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. These items will be noted on your credit report, which may have an impact on your credit scores.
Closing or switching bank accounts is a pretty straightforward process. While the actual process can vary depending on the bank, there are a few steps you should be aware of.
Your first step should be to find a new bank account, one that meets your needs. Depending on why you want to close your current account, look for new accounts that offer lower monthly fees, better interest rates, etc. Once you find the right one, typically you can either visit the local branch of the bank or open an account online or over the phone.
Next, you should transfer all or at least some of your money into your new account.
Make sure you change any automatic payments and direct deposits to your new bank account, before your 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.
Once you’ve switched over your bill payments and any direct deposits, you can go ahead and close your account. Make sure you also transfer any remaining money if you chose not to transfer it all at the same time.
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.
Although closing a bank account won’t necessarily hurt your credit scores, there are many other factors that will. Be sure to understand how your credit scores can be impacted by your actions and habits and be diligent about keeping your credit scores in good shape.
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Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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