Your credit score is increasingly important as creditors, employers and insurers use it to make decisions about your finances. Your credit score is made up of information gained from the three major credit bureaus: Experian, Trans Union and Equifax. However, because most bank accounts use a system called ChexSystem for verification, in most cases closing a checking account will not affect your credit score. However, there are some exceptions.
ChexSystem Credit Scores
ChexSystem behaves much like the three credit bureaus. It compiles information about your financial history and turns that data into a banking credit report. ChexSystem is widely used; approximately 80 percent of banks and credit unions belong to its network.
They produce their own version of your credit report which is typically used by member banks to determine whether to allow you to open a checking account. Account closures when the account is in good standing will not have any impact on the ChexSystem credit score.
FICO Credit Scores
Your FICO score is widely known as your credit score. It is calculated by a company called Fair Isaac, and scores range from 375-850. Most financial institutions use FICO scores when making financial decisions.
According to Fair Isaac's consumer website, MyFICO.com, there are five categories of data that go into your credit report: payment history, amounts owed, length of credit history, new credit and types of credit used. All of those categories focus only on credit, so bank accounts do not factor into the FICO score.
Bankrate points out that it is always a good idea to keep an eye on your credit report. You can request one copy for free each year from Experian, Equifax, and TransUnion.
Read More: Am I Entitled to Get a Free Credit Report?
Closed with Overdraft Protection
If your bank account has either overdraft protection or a line of credit attached, closing an account may impact both your ChexSystem and FICO credit scores. This is because they are seen by financial institutions as lines of credit similar to a credit card or loan. These types of accounts can be reported to the three major credit bureaus and will likely show up on your credit report.
Therefore, closing a line of credit with a bank could make a small impact on your FICO score. However, this is only a consideration if that line of credit is the oldest account in your credit history, in which case closing it could lead to an apparently shorter length of credit history.
Closed "With Cause"
While closing an account, even a long-standing account, will not affect your FICO score, if your bank closes your account "with cause," you could have some problems. "With cause" typically means that a bank has decided to close your account because you have overdrawn too many times. This information is reported to ChexSystem and it will stay on your account for five years.
Most banks use ChexSystem as an initial screening process for people opening checking and savings accounts, and many banks will not open accounts for people with a negative ChexSystem report. While this doesn't directly affect your FICO score, it can make your overall financial life very challenging, since you will have to operate without a bank account.
Improving Your Credit Score
In the event that closing out your bank account resulted in a lower credit score, there are some steps you can take to give your score a much needed boost. Experian recommends paying your bills on time, paying off your debt, keeping credit card balances low and not closing any credit card accounts, even if you aren't actively using your card. Additionally, the credit reporting agency warns against applying for new credit accounts, as the hard credit inquiries that will be conducted will lower your credit score.
- MyFICO: What's in My FICO® Scores?
- Bankrate: What You Need to Know About Your Credit Score
- Experian: How to Improve Your Credit Score
- Fair Isaac Corporation. "What is a Credit Score?" Accessed Oct. 11, 2020.
- VantageScore Solutions, LLC. "Who Uses Credit Scores?" Accessed Oct. 11, 2020.
- VantageScore Solutions, LLC. "Free Score Providers." Accessed Oct. 11, 2020.
- Fair Isaac Corporation. "What's In My FICO Scores?" Accessed Oct. 11, 2020.
Colette Stevenson has been writing since 1997, including grant applications and policy analysis for nonprofits. She has a Bachelor of General Studies from the University of Michigan and a Master of Science in nonprofit management from the London School of Economics.