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You're at the checkout line in the grocery store. Your items are already bagged. You tap your card, and it's declined. Frustrated, you try your card again, but the result is the same. You check your banking account app to find an answer, only to discover your account has been closed.
Your bank or financial institution can close your account for many reasons without warning or notice. The result can be nothing short of a financial headache. If your bank closes your account, contact them immediately to find out the reason why and take the appropriate steps to reopen it or open a new account at another bank if possible.
Does a Bank Need to Notify You That They're Closing Your Account?
Generally, banks can close your account without your permission, and they don't need to notify you to do it. However, you should receive a notification after the fact explaining why your account was shut down.
Of course, the bank must return any remaining funds in your account but may hold on to them to cover any negative balance or fees. In some cases, the bank may hold the funds if your account is flagged for suspicious activities, which is increasingly common. Deposit institutions filed 1.8 million suspicious activity reports (SARs) in 2022, a more than 117% increase from the 839,314 SARS filed in 2014, according to the U.S. Treasury.
Regularly reviewing your account messages from your bank can help you avoid being surprised by an unexpected account closure.
Why a Bank Might Close Your Account
There are a wide variety of reasons why a bank might close your account, such as:
- 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.
- Zero or negative balance: Most banks require you to deposit funds when you open your account or within a specific time frame. If you don't deposit funds as outlined in your bank's terms and conditions, they could close your account. Similarly, banks may pull the plug on your account if you fail to maintain their minimum balance requirement. Even if your bank doesn't insist on a minimum balance, they could shut down your account if you don't pay off your negative balance and fees.
- 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.
- Excessive bounced checks or overdraft fees: Banks often close the accounts of customers who frequently bounce checks. Similarly, if you don't pay a bounced check by your bank's stated due date, your account could be closed.
- Account policy violation: Another common reason for account closure is breaching the account's terms and conditions. For example, Ally Bank specifically forbids using an interest-earning checking account for business purposes, so an Ally account holder could be putting their account in danger by violating this policy.
- High volume of account transfers: Some banks limit the number of transfers you can make between accounts, such as moving money from a savings account to a checking account. Before the COVID-19 pandemic, the Federal Reserve regulated the number of withdrawals you can make from your savings account to six per month. While the agency relaxed this policy, known as Regulation D, to help people access their money during the pandemic, some banks still abide by it and may have other policies limiting transfers.
- Criminal conviction: Banks and financial institutions are regulated by the Treasury Department and other agencies. They are tasked with protecting the financial system against money laundering, terrorism funding and other criminal activity. As such, they may close the account of someone who doesn't disclose a criminal conviction when opening their account or who is later convicted of a crime as an account holder.
If your bank doesn't have your current contact information or can't contact you when they close your account, your remaining balance is sent to your state's unclaimed property office. Claiming your money from the state is typically a simple matter of verifying your identity and providing your current contact information.
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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.
- 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.
- 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.
- 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.
- 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 any 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. It's essential to stay on top of your bills, and to do this, 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
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.
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.
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.
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 by Experian to stay on top of your credit with an updated report every 30 days. You'll also receive real-time alerts about new inquiries and accounts and any suspicious activity detected on your Experian credit report.