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Ready to close a bank account but worried you could ding your credit score? Dont be.
A few easy steps and responsible banking practices will help you prevent a bank account closure from negatively affecting your credit. Heres what you need to know.
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Navigating the world of credit can be a complex endeavor, especially when it comes to managing multiple accounts While some individuals advocate for consolidating credit cards or closing unused accounts, others emphasize the importance of maintaining a diverse credit portfolio So, what’s the real deal? Does closing accounts actually benefit your credit score?
Understanding the Impact of Closing Accounts
Before diving into the specifics, let’s first establish a clear understanding of how closing accounts can impact your credit score. Several factors contribute to your creditworthiness, and closing accounts can affect each of them in varying degrees:
- Credit Utilization Ratio: This refers to the percentage of your available credit that you’re currently using. Closing an account reduces your overall credit limit, potentially increasing your utilization ratio, which can negatively impact your score.
- Age of Credit History: The length of your credit history is a significant factor in your score. Closing an older account can shorten your average credit age, potentially lowering your score.
- Credit Mix: Having a diverse mix of credit, including installment loans and revolving credit, can positively impact your score. Closing an account reduces your credit mix, potentially lowering your score.
Weighing the Pros and Cons of Closing Accounts
Even though closing an account may have some drawbacks, there may also be advantages to take into account:
- Reduced Temptation: Closing an unused account can help you avoid overspending or accruing unnecessary debt.
- Simplified Management: Having fewer accounts can make it easier to track your spending and manage your finances.
- Elimination of Annual Fees: Closing an account with a high annual fee can save you money in the long run.
Making an Informed Decision
The choice of whether or not to close an account ultimately comes down to your personal situation and financial objectives. Here are some key factors to consider:
- The age of the account: Closing an older account will have a greater impact on your credit history than closing a newer one.
- Your credit utilization ratio: If your utilization ratio is already high, closing an account could further increase it, negatively impacting your score.
- The presence of other accounts: If you have a diverse mix of credit, closing one account may not have a significant impact.
- The annual fee: If the account has a high annual fee that you’re not using, closing it could save you money.
Alternatives to Closing Accounts
If you’re concerned about the potential negative impact of closing an account, consider these alternatives:
- Keep the account open but use it sparingly: This will help maintain your credit history and utilization ratio without incurring unnecessary debt.
- Ask for a lower annual fee: If the account has a high annual fee, contact the issuer and see if they’re willing to lower it.
- Use the account for a small recurring expense: This will keep the account active and help you maintain a good payment history.
Closing a credit card account can have both positive and negative consequences for your credit score. Carefully weigh the pros and cons before making a decision, and consider alternative options that might better suit your financial goals. Remember, maintaining a healthy credit score requires a balanced approach that considers both short-term and long-term implications.
Your credit score could drop if your bank account isn’t in good standing
Some blemishes in your bank account history could affect your credit. For instance, the negative balance may be turned over to a third-party collection agency if you close an account while it has a negative balance or if the bank closes your account because it has been overdrawn for a long time. That could lead to your credit report being marred.
“This outstanding debt may be reported to any of the three credit bureaus if the bank sends it to a collection agency,” said Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, in an email. “Collections can trigger a drop in your credit score. “.
Generally, closing a bank account doesn’t affect your credit
The mere act of closing a bank account doesnt have a direct impact on your credit. Experian, Equifax, and TransUnion, the three major credit bureaus, do not normally include checking account history in their credit reports, according to the Consumer Financial Protection Bureau. But your credit could suffer if youre not careful when you close an account.
The Truth About Closed Accounts and Your Credit
FAQ
Is it bad for your credit score to close an account?
Is it better to close credit accounts or leave them open?
Does closing a credit account help your credit score?
How much will my credit score drop if I close an account?
Does closing a bank account affect your credit score?
Closing a savings or checking account generally won’t impact your credit score. If you’re tired of fees or earning a low APY on your savings, closing one bank account and opening another can improve your banking experience. Closing a long-standing credit account or paying off an installment loan might cause your credit score to dip, though.
Will closing a credit card lower my credit score?
If you have a tendency to max out your credit cards, closing an account will encourage you to spend less. However, if you shift your spending to another account, you won’t save money on that spend and you could still lower your score from closing the other account.
Can a closed credit card affect your credit score?
But if you have credit cards that don’t charge an annual fee, hang onto them if they’ve been open for years, so your credit score doesn’t drop due to a closed account. If you’re using the wrong credit or debit card, it could be costing you serious money.
Is it OK to close a credit card account?
Paying all bills on time and keeping your total credit card balances to 30% of your credit limit or less could help you maintain solid credit. Also, while it’s OK to close a bank account you’ve had for a long time, think twice before closing out a long-standing credit card account.