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What is a Closed Account?

Mary McMahon
Mary McMahon
Mary McMahon
Mary McMahon

A closed account is a financial account that has been completely terminated, making it impossible to conduct transactions using that account. If there is an outstanding balance on the account at the time of closure, the account holder can make a payment to resolve the balance and be left in good standing with the institution. There are a number of reasons why accounts may be closed, and either the account holder or the institution can initiate an account closure.

When an account is closed, it is effectively frozen. Pending transactions will not go through and people cannot create new transactions. A detailed statement will be sent to the person who holds the account, providing information about account activity and indicating whether any balance remains. Records pertaining to the account, including the account number, are kept on file at the financial institution for a set period of time. Among other things, these records allow people to direct settlement payments. If information about a closed account must be reported for tax purposes, filings for the period during the year when the account was open will be made with tax authorities.

A bank may close an account that is overdrawn for extended periods of time.
A bank may close an account that is overdrawn for extended periods of time.

Financial institutions may close accounts that remain overdrawn for extended periods of time, such as over 30 or 60 days, and they can also close accounts in response to suspicious activity or violations of terms of service. When an institution closes an account, it may be possible to resolve the problem and reopen the closed account. In other cases, while the situation can be addressed, a new account will need to be opened if a patron wants to stay with the financial institution.

People can choose to close financial accounts they are not using, or in response to concerns about fraud where a simple hold may not be enough. Accounts are also closed when people die, and any assets are held for the executor of the estate to process during probate. If a closed account has an outstanding balance due at the time of death, the financial institution will attempt to collect it from the executor, along with other creditors who may have claims on the estate as well.

While there is a legend that a closed account has a negative impact on credit scores, this is not actually the case. An account closure does not automatically cause a credit score to dip. However, for people who are utilizing credit, closing an account can reduce the amount of available credit and thus increase the percentage of available credit being utilized. This can cause a drop in a credit score, as people who are using a large percentage of their available credit are usually considered financial risks.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...

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    • A bank may close an account that is overdrawn for extended periods of time.
      By: JPC-PROD
      A bank may close an account that is overdrawn for extended periods of time.