Why Closing Your Bank Account Can Hurt Your Credit Score
Are bank accounts as toxic as your bitter ex when you try to let them go? Sometimes.
Sure, you can assume that your credit score will take a hit simply for the act of breaking up with them, but this isn’t the case. There are more concrete reasons behind why a closed bank account impacts your credit report.
If you understand why and how a closed account can hurt your credit score, you can safely navigate the breakup.
What Factors Impact Your Credit Report
To know when closing a bank account will affect your credit score, you need to know what makes up your credit report.
Of course, the actual formula they use to figure out your credit score is under wraps but, FICO does provide some general guidelines on what they consider and to what extent:
- Your on-time payment record - 35%
- Your credit utilization - 30%
- Your length of credit history - 15%
- Your credit mix - 10%
- Your recent credit applications - 10%
The main credit report components that you should pay attention to when deciding whether or not to keep an account open are your credit utilization, credit mix, and length of credit history.
Credit Utilization
Your credit utilization has a heavy hand on your credit report, making up about 30% of your credit score. Your credit utilization accounts for all the available credit you have open and is the amount of your credit that you use.
Closing an account can impact your credit utilization ratio because you’ll be removing a piece of the puzzle.
Suppose you have two credit cards, each with a limit of $1,000. If you max out credit card one with a balance of $1,000, and have a balance of $0 on credit card two, then your utilization is 50% ($1,000 credit card one balance + $0 credit card two balance = $1,000 total utilization. $1,000 / $2,000 total credit = 50% credit utilization).
Now suppose you close credit card two and are left with just credit card one. Your credit utilization would jump to 100% ($1,000 credit card one balance / $1,000 total credit = 100% credit utilization).
As you can see, a closed account impacts your credit utilization and, therefore, will affect your credit report.
Credit Mix
Your credit mix is made up of the different kinds of credit you have open. Credit bureaus give you extra points for managing different types of credit under different agreements.
If you have a student loan and a credit card, you have two different kinds of credit, diversifying your portfolio. Even if you’re not using your credit card very often, you may want to keep your account open just to have some diversification.
Length of Credit History
The length of your credit history also matters a fair amount. Not only do credit bureaus like to see that you can manage your credit over time, but they appreciate the management of the same account.
If you’re considering closing the bank account you’ve had the longest, think again!
Credit bureaus average the age of your accounts to calculate the length of your credit history. Your average can severely decrease if you close your oldest one.
Suppose you have three accounts; one has been open for ten years, you’ve had the second for four, and the third for one. With all three accounts open, the average age of your accounts would be 5 years ((10 account one’s age + 4 account two’s age + 1 account three’s age) / 3 total accounts = 5 average account age).
Now, suppose you closed the account you’ve had for ten years. You’d be left with an average account age of 2.5 years ((4 account two’s age + 1 account three’s age) / 2 total accounts = 2.5 average account age).
If you’re in your early 20s and don’t have much credit history, closing an account doesn’t have a massive impact, but you may want to reconsider if you’re approaching your 30s and have been using the same account since high school.
Keeping in mind these three components, closing one of your bank accounts can meddle with 55% of your credit report.
What Numbers You Should Aim For
Now that you know what stats on your credit report are most important, you should know what numbers you should be aiming for.
What’s A Good Credit Utilization Ratio?
When it comes to credit utilization, you want to use as little as possible. A good rule of thumb is to stay below 30% utilization. If you considered closing a credit card but decided to keep it open as a part of your credit mix, then you may want to use it to make essential bill payments.
Connecting your credit card to Netflix, subscription packages, or smaller recurring payments can keep your account active but credit utilization low.
How Many Kinds of Credit Should You Have?
Having a variety of credit accounts is best. It’s unclear what role each kind of credit plays in shaping your credit score, but diversity is critical.
Although credit mix is a component of your credit report, it’s not the most important, and you should never open an account just for diversity. There’s no exact number of credit types to aim for, but a mix helps.
What Should Your Average Account Age Be?
The longer your credit history, the more responsible you’ll appear to lenders and issuers. The longer, the better, but a general account age you should aim for is seven years.
Seven years is often recognized as a reasonable amount of time to establish a good credit history if you’re just starting out. When trying to close your oldest account, you may want to wait until your other accounts’ ages average out to seven years.
So, Can You Ever Close Your Account Without Hurting Your Credit Score?
If you’re really itching to, you can certainly close your account. Let’s take a look at the pros and cons before you decide.
The Pros
- Less temptation to spend more than what you have
- Consolidation of your finances
- Avoiding annual fees or operational charges
The Cons
- You may need the account and line of credit in the future
- It can impact your credit score if you’re not being vigilant
- You may not be able to re-open your account
If you’ve decided to close your account then go through this checklist and make sure it’ll pan out well for your credit report and your life goals:
- Closing your account won’t raise your credit utilization to above 30%
- Closing your account won’t de-diversify your credit mix
- Closing your account won’t bring your average account age to below seven years
- Closing your account will remove your access to funds for emergencies
- Closing your account won’t lead to charges and fees you weren’t expecting
If you can confidently check off all the above items, you can move forward to the final boss: customer service.
If you don’t think it’s in your best interest to close your account, there is another way to get some good use out of it – connect an Extra debit card to it.
How You Can Use Extra Instead of Closing Your Account
Extra is a debit card that helps you build credit.1 Don’t worry, Extra doesn’t ask you to open a new account and re-calculate your next steps. Once you’re approved for an Extra debit card, you can connect it to the bank account2 you were debating on closing.
By using Extra instead of closing your account you can keep diversity in your credit mix, eliminate the risk of over-spending on a credit card, and continue to work on building your credit score.
You’re Ready To Close Your Account Without the Pain
In most circumstances, you can close your bank account online, over the phone, or in person.
Be sure to receive physical or digital documentation that the bank closed your account to keep with your other bank statements. Keeping records can help you dispute an error in the future if need be.
Wait, if your bank account gets closed, can you reopen it? It all depends on your bank’s policies so make sure you do your homework before making any rash decisions.
Understanding how closing a bank account can impact your credit score should help you decide on your next steps, but you should also speak with your credit card issuer and credit counselor before making any final decisions.
Although a breakup with your bank account can be painful, it doesn’t have to be as long as you understand what factors affect your credit score.
