Having a bank account closed can be inconvenient, especially if you didn’t see it coming. But why would a bank close your account? The short answer is that banks and credit unions can close accounts for a number of reasons. Understanding why a bank account could be shut down can help you avoid an unpleasant financial situation.
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Why Would a Bank Close Your Account?
Banks can choose to close accounts for different reasons, though some might be more common than others. Here are six common situations when a bank might close your account:
- Inactivity. You might open a new bank account intending to switch funds over from your current bank. Or maybe you just opened a new checking or savings account to take advantage of an introductory bonus. If you fail to make your initial deposit by a certain date or there’s no activity on the account within a specific window of time the bank could close your account.
- Negative balance. When a bank account has a negative balance, it means you don’t have any funds available to spend. You’d need to make a deposit to bring your account balance positive again. Banks may close your account if you have a negative balance and show no signs of making a deposit to rectify it.
- Excess overdrafts. Overdrafts occur when debit transactions exceed your available balance, leaving you with a negative balance. Most banks charge overdraft fees when that occurs, which could put your account even deeper into the red. If overdraft fees are piling up, the bank might close your account to keep you from completing new transactions.
- Bounced checks. Bouncing a check means you don’t have enough money in your account to cover the amount. Banks may shut down accounts that have a history of writing bad checks or of accepting bad checks for deposit and drawing against the funds.
- Fraud. Banks may sometimes close an account if they suspect fraud. For example, the bank might freeze your account if they believe that someone is attempting to use your information to make unauthorized purchases or withdrawals. Banks can also close accounts if they believe the account owner is engaging in fraud or criminal activity, such as money laundering.
- Policy violations. Your bank account could be closed if your bank believes you’ve violated one or more of its policies. For example, if the bank has a set policy on daily ATM withdrawal limits and they find that you’re repeatedly trying to get around those limits, it might close your account.
Can a Bank Legally Close Your Account Without Your Permission?
Banks and credit unions can close accounts without the permission of the account owner. Depending on where you live, state law may require the bank or credit union to notify you in advance, but the bank doesn’t have to ask if it’s okay to close your account.
What happens if a bank closes your account? Do you lose the money in your account?
The good news is that if a bank closes your account, it’s obligated to return the money in the account to you less any fees or account closing charges that might apply. Say you deposit $500 into a new checking account but six months later, you haven’t used it. The bank could close your account for inactivity and charge a $30 fee, then pay the remaining $470 back to you.
Payment typically arrives in the form of a check mailed to the address you have on file. Now, what if the bank closes your account with a negative balance?
In that case, you’d have to make a deposit to bring the balance back to zero. Otherwise, you’d owe money to the bank and your account could be reported to ChexSystems. ChexSystems is a consumer reporting agency that collects information related to bank account closures. Having a negative mark on your ChexSystems report can make it more difficult to open new accounts at a different bank.
Can a Closed Bank Account Be Reopened?
Whether you can reopen a closed bank account can depend on the circumstances. If you closed the account yourself, then reopening the account may be as simple as asking your bank to make it active again.
If the bank closed your account, you’d first have to understand the reason for the closure. For example, if the bank closed your account because of suspected fraud but you can prove that no fraud occurred, then it may be willing to reactivate your account.
On the other hand, if the bank closed your account due to repeated overdrafts or bounced checks, there may be no getting it back. You may simply represent too great a risk to the bank based on your past account history.
What to Do If Your Bank Account Is Closed
If your bank account is closed without warning, it’s important to know what to do next. It’s possible that you may be able to recover the account. At the very least, it’s helpful to understand what happened so you can avoid a repeat of the situation.
Here are five things you can do if your bank account is closed:
- Contact the bank. The first thing you’ll want to do is reach out to the bank to ask for an explanation behind the closure. The reason will help you decide what to do next to correct the situation.
- Weigh your options. Once you know why your bank account was closed, you can figure out how to address it. For example, if a negative balance is the reason, you could make a deposit to clear what’s owed. Or if the bank closed your account for inactivity, you might ask your funds to be returned so you can deposit the money in a different account.
- Request account reopening. If you want to continue using the same bank, you could ask to have the account reopened. Whether it makes sense to do that may depend on the reasons for the closure and how happy you are with the bank overall.
- Check your ChexSystems report. When a bank account is closed for a negative reason, that can show up on your ChexSystems report. You can request a free copy of your report through the ChexSystems website to see what the bank reports. That can help you gauge how likely you are to be denied a bank account elsewhere.
- Open a new bank account. If you decide not to reopen a closed account or the bank isn’t willing to do so, you may need to open a new account. Keep in mind that if your account was closed for excessive overdrafts, bounced checks or fraud, that may limit your options. You might need to explore second-chance bank accounts, which are designed for people with negative banking history.
Bottom Line
Why would a bank close your account? The simple answer is that it all depends on the details of the situation. Knowing what to do next once a bank account is closed can help you minimize disruptions to your financial life.
Checking Account Tips
- Consider talking to your financial advisor about which bank accounts might be best for you, based on your money goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When comparing checking accounts or savings accounts, it’s important to consider how well they match up with your needs. Traditional checking accounts may offer branch banking access, but you might enjoy better perks or benefits with a checking account from an online bank. Reviewing the best checking accounts and the best savings accounts can help you find the right account options for you.
Article by Rebecca Lake, CEPF®, SmartAsset.
