What to Do if Your Bank Closes Your Account

Why Would a Bank Close Your Account?

Your bank could close your account for a wide variety of reasons, including:

• Inactive or low activity: Banks may discontinue your account if you haven't had a check or debit transaction in a long time. Generally, though, your account must show little or no activity for a few years before the bank shuts down your account. Banks may determine you've abandoned your account if there's been no activity for three to five years. In that case, you should receive a closure letter from the bank, and the bank must return any remaining balance.
• Repeated overdrafts or negative balance: Your bank may also close your account if you have a negative balance from overdraft fees and do not pay it off. Banks also may close the accounts of customers who frequently bounce checks.
• Account policy violation: Another common reason for account closure is breaching the account's terms and conditions. For example, your bank may require you to meet minimum balance requirements to avoid fees and ensure your account stays open.
• Suspicion of fraudulent activity: If your bank suspects fraudulent transactions on your account, they may close it to prevent further illegal activity. For instance, your bank may suspect you're a victim of identity theft or that your account is engaging in money laundering or wire fraud.

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4 Steps to Take if Your Bank Account Gets Closed

Having a bank account closed could make it harder to open a new account right away, although you can take steps to make it easier to open a new account. Here are four steps to better understand why your account was closed, resolve the issue and minimize any collateral damage.

1. Contact the bank. Call the number on the back of your debit card or find the bank's contact number online to request information as to why they closed your account.
2. Settle the balance (or request a check). Ask what your bank balance is. If you have a negative balance, ask what the options are to pay it off. If you have a positive balance, ask how you will receive those funds. For accounts that have been inactive for several years, you may have to contact your state's unclaimed property office to get the cash.
3. Request to reopen the account. In some cases, the bank may reactivate a dormant or inactive account when you make a deposit or withdrawal. But if reopening an old account isn't possible, you could request to open a new bank account with the same financial institution before you explore other options at a different bank.
4. Redirect direct deposits and payments. Your bank could place a hold on your account, especially if it detects fraudulent activity or if you have a negative balance. Consider stopping any direct payments to your account, including your paychecks, and either receiving a check or redirecting deposits to a secondary account. That way, you can continue to pay your bills while you sort out the issues with your bank. To avoid late fees or missed payments, it's important to quickly reroute any bills automatically paid from your closed account to another form of payment.

The Consequences of a Bank Closure

It's bad enough when your bank closes your account, but the consequences can add salt to the wound. Here are some of the consequences of a bank closure you might encounter, and what you can do about them.

Account Closure Reported to ChexSystems

If your bank account was involuntarily closed because of an unpaid balance or suspected fraud, it could affect your ability to open a bank account in the future. That's because banks typically review your banking history from reporting company ChexSystems as part of the application process, and negative history, including the closure of your account, could result in a denial.

Fortunately, you're entitled to a free copy of your ChexSystems report every 12 months, and you have the right to dispute any inaccurate records. Once you settle your outstanding bank account balance, request to have the record removed from your ChexSystems report.

Balance Could Be Turned Over to a Collection Agency

Another important factor to consider when your bank account is closed is that unpaid bank balances could be forwarded to a collection agency. Collection accounts reported to the credit bureaus can appear on your credit reports and affect your credit scores for up to seven years. When you're ready to buy a house or car, or obtain another form of credit, negative items like collections on your credit report could come back to haunt you.

May Be Temporarily Bankless

It could be difficult to find another bank willing to work with you, especially if your bank reports the closure to ChexSystems. Unless you already have another bank account, you could be without an account while you work to resolve the issue with your old bank.

Being unbanked can pose significant financial challenges. It's essential to stay on top of your bills, and without a bank, you may need to use money orders or a prepaid credit card to make your payments. Another option is to make payments in cash by visiting the offices of the companies you owe.

Just as it's usually wise to diversify your investment portfolio, it may make sense to have more than one bank account. Having all of your money tied up in one bank or credit union could leave you in a dreadful position if your bank suddenly decides to close your account.

How to Avoid Bank Account Closures

Here are some tips to help avoid having your bank closing your account:

• Avoid a negative balance. Perhaps the best way to avoid a closure on your account is to prevent your balance from dipping into negative territory. Set up low-balance alerts to stay on top of things. Regularly checking your balance is generally a good financial habit to keep your account out of trouble. Similarly, it's also wise to use your account regularly to avoid a closure due to inactivity.
• Don't get flagged for suspicious activity. Some banking experts recommend depositing large checks in person to avoid problems with your bank. That's because banks may turn a suspicious eye towards large checks, particularly if you don't normally deposit such sizable amounts.
• Consider second chance banking. Some banks and fintech companies offer second chance banking products that are easier to qualify for and may not require a ChexSystems report. Using this type of account could help you manage your cash and rebuild a positive banking history for the future.

Frequently Asked Questions

The Bottom Line

Closing a bank account may not directly affect your credit. However, consequences stemming from a closure could indirectly harm your credit scores. For example, if your account is closed and an automatic payment isn't made to one of your debt accounts, it could appear as a late payment on your credit report for seven years and impact your scores.

Consider getting free credit monitoring with Experian to stay on top of your credit with updated reports when you want them. You'll also receive real-time alerts about new inquiries and accounts and any suspicious activity detected on your Experian credit report.