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Does Closing a Bank Account Affect Credit?

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Let’s say you’re ready to close your bank account. Maybe you’re done with the high monthly charges, or the bank hasn’t treated you well or you’ve found a better bank. Whatever the reason is, you should stop and ask yourself, is it bad to close a bank account? After all, you don’t want to impact your credit score unknowingly.

The answer is yes, closing a bank account can indirectly impact your credit score. While banks don’t report consumer bank account information to the credit bureaus, they can report a checking account that is not in good standing.

That’s why it’s essential you learn what the potential consequences are and what you should consider before closing your bank account.

What Happens When You Close a Bank Account?

Before you consider closing your bank account, make sure you have a new one set up elsewhere. It’s essential you have at least one savings and one checking account.

Next, change your direct deposit payment details (if this is how you get paid) to your new bank account. At the same time, you’ll want to change the banking information for any pre-authorized debits, such as car insurance, rent or mortgage payments.

Make sure you stop writing checks for your old checking account. You’ll also want to track the checks you’ve written recently and make sure they’ve all cleared.

Give yourself a couple of weeks to monitor your old and new accounts. You’re looking to make sure your old account no longer has any activity and your new account is problem-free.

When you’re ready, you can call or visit your financial institution to close your account. Ask if there are any fees associated with closing the account and approximately how long it will take. If there’s any money left in the account, withdraw it or transfer it to your new account.

Check back in and make sure you cannot access the account after it’s been closed to verify the process is complete.

Closing a Checking Account

So, does closing a bank account hurt your credit? It’s important to understand that if you close a checking account with a negative balance still outstanding, this data will be reported to ChexSystems. (We’ll discuss ChexSystems in more detail below.)

Additionally, if the balance remains outstanding for an extended period of time, banks can send your account to a collection agency. And a collection agency will likely report to a credit bureau, which could impact your credit score.

Closing a Savings Account

Like a checking account, your savings account can incur various fees that cause it to have a negative balance. You could have insufficient fund fees, a wire-transfer fee, ATM fees or charges for not maintaining a minimum balance.

Ensure your savings account doesn’t have any outstanding fees before you close it. If there will be a fee for closing the account, pay it up front so it doesn’t come out of your closed savings account.

When Closing a Bank Account Affects Your Credit Score

The only time closing a bank account affects your credit score is if it has a negative balance. If you take too long to pay this balance to the bank, the financial institution can send the debt to a collection agency. A collection agency collects debts on behalf of third parties. And, in their debt collection process, a collection agency will usually report delinquencies to credit bureaus. This unpaid debt then becomes a part of your credit score, ultimately lowering it.

Overdraft Protection

Another critical factor to consider is how your checking account’s overdraft protection can impact your credit report.

Most banks encourage their users to sign up for overdraft protection because it’s like a “safety net” for forgotten bills or payments. When the bank applies overdraft protection to your account, it agrees to cover your overdraft based on the limits, conditions and fees spelled out in your agreement with them. This is especially useful for surprise charges.

However, what most consumers don’t know is that overdraft protection is considered a line of credit. So, when you add overdraft protection to your account, you may see a hard inquiry on your credit report. And a hard inquiry typically drops your credit score by a few points for a couple of months.

If there are any issues with your overdraft protection down the line, it can directly impact your score. Some of these issues might be:

  • The bank decided your overdraft protection has been abused and cuts off the line of credit
  • Your account has been closed with an outstanding balance and the bank sends the outstanding balance to a collection agency

The bank can choose to report these issues to the credit bureaus, where it will become part of your credit report.

ChexSystems

According to Bankrate, the banks and credit unions created ChexSystems to help identify problematic account holders who aren’t reliable in managing their bank accounts. ChexSystems identifies people who have frequently abused or closed checking accounts or who have multiple overdrawn balances.

As previously mentioned, banks don’t generally report your checking account information to credit bureaus. But they can report it to ChexSystems. The main reasons for reporting an account to ChexSystems are:

  • The individual closed an account with an outstanding overdraft balance
  • The individual has a history of multiple overdrafts
  • The individual abused his or her account or ATM access
  • The bank suspects the individual used his or her bank account(s) to participate in fraud
  • The individual opens and closes accounts too often
  • The individual frequently loses debit cards or checks

Once you’ve been reported to ChexSystems, it can become incredibly difficult to open another bank account. The major financial institutions rely on ChexSystems records before approving individuals for new accounts. Similar to the credit bureaus, ChexSystems has ratings for consumers that range from 100 to 899. A higher score indicates a less risky consumer.

If you’re reported to ChexSystems, expect to have that blemish on your history for up to five years. Having more than one report against your name in the system means you’ll likely be unable to do any regular banking and have to sign up for a second-chance account—less desirable accounts which have more requirements and offer fewer services than regular accounts

You can request a copy of your ChexSystems report once every 12 months or if you’ve been denied an account in the last 60 days. Request your report directly through ChexSystems and you should receive it within five business days.

How to Close a Bank Account Without Hurting Your Credit

You can close a bank account without hurting your credit score. Simply make sure you have all your bases covered by following these steps:

  1. Ensure you don’t have an outstanding negative balance on the account.
  2. Make sure you’ve identified if there will be any fees for closing the account, and pay them up front or leave enough money in the account to pay them off.
  3. Don’t close and open several accounts back to back.
  4. Check your closed account to ensure no hidden negative balance pops up.
  5. Consider the potential impact of overdraft protection on your credit score when you open a new account.

Now you have the answer to the question, “Is it bad to close a bank account?” And hopefully you understand the proper steps you need to take to close your account safely without negative consequences to your credit report.

Ultimately, you always want to make the right decisions to benefit your financial health and protect your credit score. After all, a good credit score opens many doors in life, such as approvals for car loans, mortgages, rental agreements and even job opportunities.

If your credit score is lower than it should be, you can work to improve your credit with our credit repair services. We can help you remove inaccurate or unfair negative items listed on your credit report, and you’ll also learn about healthy credit score habits along the way. Contact us today to find out more.


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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Credit Cards

Should you pay down debt or save for retirement?

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rebuilding credit

While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.

Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.

If you have high-interest debt, pay it down

When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).

In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.

High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.

To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.

If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.

Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.

If you’re nearing retirement, start to save

The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).

Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.

Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.

Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.

Aim for both goals by improving income

As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.

The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.

If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.

For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.

While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.



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How does a loan default affect my credit?

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Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.

Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.

30 days late

Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.

The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.

More than 30 days late

Payments that are more than 30 days past due can trigger increasingly serious consequences:

  • The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
  • You may receive phone calls and letters from creditors demanding payment.
  • If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.

Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.

Other ways a default can hurt you

Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:

  • If you default on a car loan, the creditor can repossess your car.
  • If you default on a mortgage, you could be forced to foreclose on your home.
  • In some cases, you could be sued for payment and have a court judgment entered against you.
  • You could face bankruptcy.

Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.

How to avoid a loan default

Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:

  • For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
  • For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.

Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.

Clean up your credit

The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.

Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.



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How to identify credit repair scams

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

If you have poor or damaged credit and want to repair it, you may have considered using a credit repair service to help. Unfortunately, there are many companies and individuals that want to take advantage of unsuspecting consumers needing help with their credit. 

While there are legitimate companies that can help you repair your credit, there are also credit repair scams that are only after your money and your information for identity theft purposes. To keep both safe, we created this guide to help you tell the difference between legitimate credit repair companies and credit repair scams.

Five signs of a credit repair scam

There are many things credit repair companies are not allowed to do or promise customers. If it sounds like it’s too good to be true, it probably is, and you should steer clear of that company. We’ve put together a list of signs you should watch out for when working with credit repair companies.

1. Guaranteed results

Under the Credit Repair Organizations Act (CROA), credit repair companies cannot guarantee results. Here are a few common examples of false promises unethical credit repair companies might make:

  • Improvement to your credit score
  • Results in a fixed time period
  • Removal of all of negative items, even if they are accurate

2. Up-front payment is requested

The CROA prohibits credit repair companies from asking for any payment before they render services. Many scammers know that most consumers don’t know this and, as a result, promise a quick turnaround on credit repair for a large upfront payment.

Some illegitimate credit repair companies may not allow you to cancel unless you pay a fee. All credit repair companies are required by law to give you at least three days to cancel services with them and there is no penalty for canceling.

3. Claims a new identity is needed 

A credit repair company can’t promise or offer you a new identity. Anyone offering you a new identity is a fraud. Besides guaranteeing results, scammers may try to promise you a clean slate with a new Employer Identification Number (EIN) or a Credit Privacy Number (CPN).

They tell you to use these numbers on your future credit applications instead of your Social Security Number. We explain more about common credit repair scams below.

4. Don’t explain your legal rights

Credit repair companies should explain your legal rights to you from the beginning. These are a few common things an unethical credit repair company might do.

  • Tells you not to contact the credit bureaus directly
  • Doesn’t give you a copy of the contract to review before signing
  • Fails to inform you that you can repair your credit yourself without the help of a credit repair company
  • Leaves out important information from the contract, like the date services will be executed or the amount you will pay

If you feel like the company isn’t telling you everything or refusing to answer your questions, you should seek services elsewhere.

5. Asks you to misrepresent information

Finally, an unlawful credit repair company might ask you to misrepresent your information. This can range from unlawfully using an EIN or CPN number in place of your social security number to claim you are a victim of identity theft when you’re not.

five signs of a credit repair scam

Common credit repair scams 

You’ll most likely see credit repair companies illegally promising results. However, it’s important to familiarize yourself with other scams so you understand what is and is not legal. We highlighted a few common ones below.

File segregation schemes 

A file segregation scheme is when a company or individual offers to give you an Employee Identification Number (EIN) to use in place of your Social Security Number when you apply for credit. It’s illegal for companies to do this, and it’s illegal for consumers to obtain one to use in place of their Social Security Number. 

Credit privacy numbers 

Like an EIN, a Credit Privacy Number (CPN) is created by scammers to use in place of your Social Security Number when applying for credit. Simply put, a CPN is a fake Social Security Number. Usually, these are created using somebody else’s identity, and using one can be considered identity theft. 

Tradeline renting 

Tradeline renting is when you pay for authorized user status so that the tradeline shows up on your credit reports to improve your score. This doesn’t repair any negative information on your credit, but adding a positive tradeline to your credit report can boost your score.

While this isn’t necessarily illegal, it can get you into trouble. There is nothing wrong with a loved one adding you as an authorized user. However, if you pay to “rent” a tradeline from a stranger, you don’t know how it will impact your credit and it may be a scam to get your money. 

credit repair scams to watch out for

What to do if you are scammed

There are a few things you can do if you realize you’ve fallen victim to a credit repair scam. Take a look at your options below.

who to report a credit repair scam to

Can credit repair companies fix your credit?

Yes, a legitimate credit repair company can help you work to remove inaccurate negative items from your record that may be damaging your credit score. Here are ways to recognize a legitimate, expert credit repair company. Although you can work to repair your credit yourself without a credit repair company, ideally a credit repair company would make the process much easier. Here are some signs of a legitimate, expert credit repair company:

  1. They create a repair strategy custom to your unique situation. A good credit repair company will customize their course of action only after evaluating your credit reports and credit history. Everyone’s credit history is different, and their approach to repairing your credit should reflect that. 
  2. Maintain communication with you during the process. A credit repair company that maintains scheduled calls, emails or any other form of communication with you will help you stay up-to-date with their progress. They shouldn’t keep you in the dark as they’re conducting their services. 
  3. Informs you of your rights from the beginning. At the time of signing, a credit repair company should provide two documents: a disclosure of your right to repair your credit yourself and a detailed contract of services.
  4. Make realistic claims about their services. Like we said above, credit repair companies cannot guarantee results. A legitimate credit repair company will not guarantee timeframes or point changes, but they can guarantee the delivery of services—access to credit monitoring tools, or letters delivered on your behalf. 

How to safely repair your credit

Making payments on time and disputing inaccurate information on your credit reports can help you repair your credit. While you can do this on your own, a professional credit repair firm like Lexington Law Firm will make the process easier and more efficient.

Lexington Law Firm proudly adheres to CROA to make sure we give our clients the best experience possible. For over a decade, we’ve helped clients challenge information that is unfair, inaccurate and unsubstantiated. Give us a call today for a free, personalized credit report consultation.


Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.

Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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