Closing a savings account can negatively affect your credit if the account has a negative balance when closed. Credit bureaus do not consider savings and checking activities, including account closures, when compiling credit scores. But if you don’t pay off a negative balance in a closed account, the bank may take it to a collection agency. This will likely be reported to a credit bureau, which can cause a significant and lasting deterioration in your credit score. You can avoid problems by closing savings accounts properly and making sure there are no outstanding balances.
Speak to a financial advisor before taking important steps that could affect your personal finances.
Basics of closing a savings account
Having a savings account is the key to good personal financial health. However, sometimes you will want to close a savings account. For example, you can find another savings account that has lower fees or pays more interest. If you have multiple savings accounts, closing all but one can make it easier to keep track of your finances.
Maintaining a good credit rating is also important for a strong financial position. Your credit score can determine whether or not you can get a loan to buy a car or a house, as well as the cost of the loan. Credit scores are also considered when applying for a job, an insurance policy, and even a residential lease. Most of the time, closing a savings account won’t affect your credit score. Banks do not report account activity to credit bureaus. However, banks report closed accounts with an outstanding balance to ChexSystems.
What is ChexSystems?
ChexSystems is a service that maintains files of individual consumer banking activities, such as opening and closing accounts, credit inquiries, bad checks and unpaid charges. Banks, credit unions and credit card issuers turn to ChexSystems for information on new account applicants. Negative entries in your ChexSystems file, such as a history of overdraft protection abuse or opening and closing too many accounts too quickly, can make it difficult to open a new account.
ChexSystems also reports certain account-related activities to the credit bureaus. Specifically, if you close an account with an outstanding balance, this information may end up on your credit file, courtesy of ChexSystems. Even then, your credit score probably won’t feel it, at least not yet. The real impact occurs if you don’t pay the outstanding balance.
Causes and consequences of negative balances
A savings account can end up with a negative balance in several ways. You may incur fees for using an ATM, for not maintaining a sufficient balance, or for a wire transfer. Usually, these fees will be paid from the funds in the account. But if you close the account before the fees are paid, you could end up with a closed account with a negative balance.
It’s still not a problem for your credit score unless you don’t pay the bank the money and they turn the account over to a collection agency. When the collection agency reports it to a credit reporting agency, as is likely, it will be considered negative on your payment history, which is the main factor affecting your credit score. And a collection account stays on your report, lowering your score, for seven years.
Safe closing of savings accounts
You can avoid this situation by smartly closing your accounts. Before you close a savings account, start by opening a new one or at least make sure you have one open. Cancel automatic transfers to or from the account. Wait for all recent transfers to be cleared. Check with the bank to make sure you don’t have a negative balance. Consider leaving funds in the account for a few weeks to cover late fees. After you close the account, come back later to make sure you left it in good standing.
You could hurt your credit score if you close a savings account that has an outstanding negative balance and don’t repay the debt to the bank. Outstanding negative balances can be turned over to collection agencies, who will likely report it to the credit bureaus. Whenever an account is in collection, it will appear as a result in your payment history, which is the most important factor considered when calculating credit scores.
It’s hard to know how much you should keep in a liquid savings account. You’ll want to look at a number of factors ranging from your monthly expenses to your potential income. You can also simply work with a financial advisor who can help you plan properly and develop a plan to get there. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
If you’re looking for a new savings account, SmartAsset’s review of the best savings accounts is a good place to start. This review pulls together key data points such as annual percentage return, fees, and minimum opening balance and identifies which institutions offer the best overall deals.
Photo credit: ©iStock.com/HATICE GOCMEN, ©iStock.com/fotostorm, ©iStock.com/tolgart
The publication Does Closing a Savings Account Affect Credit? appeared first on SmartAsset Blog.