What Happens When the Bank Closes Your Account

Q: Can a bank account be closed permanently?

Yes, banks may close your account for many reasons including inactivity, a large number of overdrafts and/or bounced checks or fraud prevention.

Q: Do closed accounts hurt your credit record?

Bank account closures do not appear on your credit report. However, if you owe overdraft or other fees on the account, the bank may send the unpaid balance to a collection service. That collection may show up on your credit report and negatively impact your credit rating.

Q: Can a bank legally close your account without permission?

Yes, banks are not required to receive your permission to close an account. They are also not required to notify you before closing the account, although many banks do give customers plenty of warning before closing an account.

What Happens When the Bank Closes Your Account

Walecia KonradUpdated July 6, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

There are various reasons why a bank could close your account. Depending on your situation, a closed account can cause a lot of consequences. But there are steps you can take if this happens to you. Here’s what you need to know.

Why Would a Bank Close Your Account?

Banks have the right to close accounts anytime for a number of reasons. This is different from when consumers close their bank accounts. Keep in mind, banks are not required to give customers notice when they are about to close an account, although many do.So what happens when the bank closes your account? Here are some of the most common reasons, which will help you understand what comes next.

Inactivity or Zero Balance

If you haven’t written a check, used your debit card, or made an electronic transaction in several years, a bank may choose to close your account. Any money left in the account may go to your state’s unclaimed property division.Having no money in the account for weeks or months is another reason banks close accounts. This can be true even if your account doesn’t require a minimum balance.

Overdrafts and Bounced Checks

Overdraft is “bank speak” for having a negative balance. This happens when you write a check, make a debit card payment or ATM transaction, or execute an electronic withdrawal for more money than you have in your account. Many banks offer overdraft protection to cover the amount needed, but you must pay the amount back, usually with interest and hefty fees.Repeated overdrafts may spur a bank to close the account after withdrawing the amount owed for overdrafts and fees. Keep in mind any amount owed is still due, even if the account is closed.Bounced checks work the same way. When your check is returned because there isn’t enough money in your account to cover the value, most banks will charge expensive fees. If you have more bounced checks than the bank allows, it may pull the plug.

Too Many Transfers

Banks have limits on how many transfers you can make between different accounts. This is especially true with savings accounts. If you make more transfers than the limit allows, the bank may close your account or convert it to a different type of account.

Identity Theft or Fraudulent Activity

A bank may close or freeze your account if it thinks you are a victim of identity theft. This is an effort to limit any further damage.By the same token, if a bank thinks you are engaging in fraudulent activities via your account, such as money laundering, it may close the account in question.Also, banks have been known to close accounts when customers have been convicted of a crime.

A Change in the Bank’s Status

Accounts close when a bank shuts down, shuts your branch or stops doing business in a particular state.Recommended: Business Bank Account vs. Personal Bank Account

Can a Bank Close My Account Without My Permission?

Yes, banks may close an account for almost any reason and they do not need to have the customer’s permission.As mentioned above, banks have no legal obligation to inform you when they are closing your account, although in practice many do notify customers before a closure.

What Are the Consequences of a Closed Bank Account?

A lot depends on how active the account is. If you are still using the account regularly, there can be lots of consequences.For instance, if you are still using the account to pay bills, and the account gets closed, those bills won’t get paid and you may incur late fees and overdraft fees.If your paycheck is still being deposited into the closed account, you may have trouble accessing your money.When a bank closes your account, it often shows up on your ChexSystems report. This report tracks checking and savings account activities, including account openings and closing. If you have a record of a bank account closing on your report, you may have trouble opening a new bank account at another financial institution.Finally, if you owe any overdraft or other fees on the account, the bank may send the unpaid balance to a collection service. That collection may show up on your credit report and negatively impact your credit rating.Recommended: Closing a Bank Account and Credit Scores

6 Steps to Take When a Bank Closes Your Account

Here are some things you can do to protect yourself when a bank closes your account. Some or all of these steps may apply to you, depending on your specific situation.

1. Stop Direct Deposit

The minute you know your account is closed, call your HR department and stop the direct deposit of your paycheck. Have them issue you a paper check until you set up a new account. Any freelance clients or gig work that pays you directly should be notified as well.Recommended: Stopping Automatic Payments from Checking

2. Stop Automatic Transfers and Bill Payments

Next, contact all of the vendors who are receiving automatic payments from that account – utilities, gym, streaming services etc. You want to avoid overdraft and late fees on those bills. Work with each vendor to determine another payment method.

3. Call the Bank

Now that you’ve stopped the worst of the damage, call your bank and ask why the account was closed. They may be willing to set up a temporary, limited account to help you keep up with bills, etc.

4. Set Up a Payment Plan

If you owe any past fees or overdraft payments on the closed account and you can’t afford to pay them in full, work with your bank to set up a payment plan. This will help make the debt manageable and avoid having your balance sent to a collection agency.

5. Get a Copy of Your ChexSystems Report

As mentioned above, banks often report closed accounts to the ChexSytems reporting agency. You are eligible for a free copy of your report every 12 months, so you can amend any erroneous information and get a clear picture of what other banks are seeing when you try to open an account.

6. Consider Filing a Complaint

If you think your account has been closed unfairly, you can submit a complaint to the federal Office of the Comptroller’s Customer Assistance Group.

Can a Closed Bank Account be Reopened?

If your bank account gets closed can you reopen it? A bank may reactivate a dormant account if you start to use it again, such as making regular deposits. But once an account is actually closed, it usually stays that way.You may be able to open another account at the same bank, although the chances are slim if your account was closed because of delinquent payments or fees. In those cases, you may want to look into “second chance” accounts. These accounts have fewer qualification requirements. So the answer to the question if your bank account gets closed can you reopen it is, you may be able to but choose another course of action.

How to Avoid a Bank Account Closing

The simplest way to avoid the hassle of a closed bank account is to avoid having a negative balance.Check your balance on your bank app often, including every time a bill comes due or you make a purchase. Set up a low-balance alert and alerts for any withdrawal activity on your account.You may also want to link your checking account to a savings account. In many cases, the bank will automatically cover any overdrafts in your checking account from funds in your savings account, often without a fee.Recommended: Linking Bank Accounts: A GuideIn cases of inactivity, if you are not using an account that has a balance but you want to keep it open, simply increasing the frequency of your deposits and withdrawals can bring your account back to full status.

The Takeaway

Many consumers are surprised to learn that a bank can close their account for many reasons without notification. When your bank account is closed you may have trouble paying bills, accessing your direct deposits and opening a new account. But there are steps you can take to make sure this doesn’t happen to you. Chief among them – keep track of your bank balance so you don’t go into negative territory.Lantern can help you find the best savings account for your needs.

Frequently Asked Questions

Can a bank account be closed permanently?

Do closed accounts hurt your credit record?

Can a bank legally close your account without permission?

Photo credit: iStock/Jun

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About the Author

Walecia Konrad

Walecia Konrad is an award-winning financial journalist with 25 years of experience in print and digital media. She is a graduate of Syracuse University and specializes in the topics of health care, personal finance, and employer-sponsored benefits. Konrad's work has been seen on CBS MoneyWatch, The New York Times, Money, SmartMoney, BusinessWeek, and Forbes. She has been the recipient of both a Pearl Award for Best Web Publication of the Year and a National Magazine Award for Personal Service.

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