Dormant accounts: How inactive banking costs you money

Millions of Americans have money sitting in dormant or forgotten bank accounts. In fact, an estimated one in seven people has some form of unclaimed property. Bank accounts are one of the most common forms of unclaimed property.

Every dollar matters these days. And yet, millions of Americans let money slip away in unused and forgotten bank accounts.

Whether you’re simply leaving an account unused or have forgotten about it altogether, having an inactive account means money is slipping through the cracks. Most people can’t afford to let that happen, so it’s important to take steps to protect this property.

What qualifies as a dormant bank account?

A dormant bank account is an account that you haven’t closed, but that you haven’t used for an extended period. Basically, if you haven’t deposited or withdrawn any money for a long time or given any instructions regarding an account, it may be in danger of being considered dormant.

Banks have differing policies on what is considered a dormant account. Generally speaking, if you haven’t had any activity in an account for a year, it could be considered dormant. Note that activities such as interest payments and fee charges don’t count, because they are initiated by the bank rather than by you.

Certificates of deposit (CDs) are a little different because these aren’t expected to have any activity during the CD’s term. Plus, many roll over automatically into a CD of similar length if you don’t give any instructions to do something different. The danger with CDs is that they are so passive that they could easily be forgotten.

What is an inactive account?

Some banks distinguish between inactive and dormant accounts. They may first classify an account as inactive after a period without activity and later classify it as dormant if the inactivity continues. Policies on inactive vs. dormant accounts vary by financial institution.

Six ways a dormant bank account can cost you

So perhaps you have a bank account that you aren’t actively using. What’s the harm in that?

The harm is that completely neglecting a bank account can cost you money in several ways:

1. Monthly maintenance fees. Some bank accounts charge monthly fees whether you use the account or not. In many cases, these fees can exceed the interest you earn on the account. Paying a fee for an account you’re not using is a waste of money and could eventually deplete the account to nothing. Not all banks charge inactivity fees, and some states restrict or prohibit them from certain types of accounts.
2. Inactivity fees. Some banks will actually charge you a fee for not using the account. These fees may be charged if you don’t initiate any transactions within a specified length of time, such as one year.
3. Lost interest. Interest rates on checking and savings accounts can change at any time. Rates vary widely from one bank to another. For example, the most recent MyBankTracker rate survey found savings account rates ranging from a low of 0.01% to a high of 4.31%. On a $10,000 savings account, that would be the difference between earning $1 a year in interest and earning $431. If you don’t actively keep tabs on an account and monitor whether there are better alternatives, you risk leaving that kind of money on the table year after year.
4. Unmonitored errors. Everybody makes mistakes, including banks. Keeping your own records and comparing them with regular bank statements is one way to spot those errors. If you don’t keep track of your accounts, mistakes can go unnoticed and cost you money.
5. Fraud. Monitoring activity in your bank accounts allows you to spot suspicious transactions. These can be the best way to discover that someone has stolen or altered a check, has hacked into your account, or is otherwise siphoning money out of it. That kind of unauthorized activity can even be a sign of broader identity theft.
6. Lost use of funds. Even if no one is drawing down your account, simply forgetting about it can be as bad as losing money. You’d probably be upset if you left your wallet somewhere. By the same token, you should guard against leaving money unused in an account.

Why do accounts go dormant?

It may seem hard to believe that someone would simply forget about a bank account. And yet, it’s surprisingly common. Here are several ways it can happen:

• Changing banks. There’s actually a trend toward something called “soft switching.” This is when a customer opens an account at a new bank and starts using that as their primary account but never bothers to close the account it’s replacing. Think of it as ghosting someone instead of letting them know you’re breaking up. The danger is that you gradually just stop using the old account but never get around to closing it.
• Changes of address. If you move or change your email address, you may start missing communications from your bank. This can lead to accounts being forgotten.
• Memory issues. People who are experiencing dementia or other memory loss might simply forget about an account.
• Joint accounts. People often have joint accounts, but only one person keeps track of the banking relationship. If that person dies or leaves the household, the other person may not think of checking the account.
• Inherited accounts. When someone passes away, they may not leave a detailed list of all their banks and account numbers. This can make it difficult for the deceased’s heirs to track down all their money.

When a dormant account may make sense

Leaving an account unused can make sense under some circumstances, if you have a plan for what to do about it eventually.

For example, when you’re changing your checking account, it can be helpful to have an overlap period between the old and the new accounts. You can fund the new account and start using it. However, you can leave some money in the old account to make sure all the payments you’ve committed to have been processed before you actually close it. This can also give you time to make sure things like direct deposits and automated payments are working smoothly in the new account.

This process should take no more than a couple of months to complete. If you let it drag on longer, there’s a risk that you’ll simply lose track of the old account as you get into the habit of using the new one.

Legal status of dormant accounts

Having an account sit at a bank unused is only part of the problem with a dormant account. A bigger problem can arise if an inactive account is claimed by your state government through a process called escheatment.

Escheatment

Escheatment is a transfer to the state of property that has been abandoned. Which state receives the property is based on the last known address of the owner of the property.

If you have an account that has had no activity for a few years and the bank can’t get in touch with you, it might be considered abandoned. In most cases, the bank will try to get in touch with you, but if there has been a change of address or if the original owner has passed away, this might not work.

If the bank can’t get in touch with you, it will begin the process of transferring the property to the state.

State laws

Escheatment laws vary by state, but generally the process is this:

• An account may be considered abandoned if it’s been inactive for a long enough period — typically three to five years.
• In that case, the bank will try to get in touch with the last known owner.
• If the effort to contact the owner fails, the bank will report the account to the state.
• If the state agrees that the account has been abandoned, it will notify the bank to transfer the contents of the account to the state.
  

One purpose of this process is to clear the bank from any legal responsibility for an abandoned account. Once the property has been transferred to the state, the bank is no longer liable for its condition.

Preventing an account from going dormant

Preventing an account from going dormant is usually pretty simple. It starts by knowing any activity rules your bank has. These may involve the customer initiating at least one transaction within a given period. If necessary, you can make a small deposit or withdrawal to satisfy the requirement.

You should also take care to formally notify your bank any time your address changes. Finally, include details of any financial accounts in your last will and testament so your heirs know how to find those accounts.

Reactivating a dormant account

Even once an account is dormant, you should be able to reclaim it. The first thing you need to do is to find out if the account is still with the bank where you left it.

Finding a dormant account

Here are some steps for finding a dormant account:

• Start by contacting the bank where you last knew the account to be.
  
• If that bank is no longer in business, you can check on the FDIC website to see what may have happened to the account. You can try the FDIC’s BankFind tool to find out which institution took over for the bank. The FDIC also has a page for tracking down unclaimed funds.
• If you can’t locate the account that way, it may have been claimed by the state. You can try searching for it on MissingMoney.com. This site is endorsed by the National Association of State Treasurers. This kind of search should be free. Watch out for missing property scams that want to charge you a fee for doing a search or ask for sensitive personal information.
• Search your state’s unclaimed property office or the National Association of Unclaimed Property administrators (NAUPA) directory at Unclaimed.org.
  

Documenting ownership

To reclaim an account that has been dormant, you’ll need certain documentation:

• If you were the original owner of the account, it helps to have the account number and the account agreement from the bank. If you don’t have the agreement, you’ll need to verify that your identity matches that of the account owner.
• If you’ve inherited the account from someone else or are acting on another person’s behalf, you’ll need legal documentation to prove you have authority over the account. This might include the original owner’s will or power of attorney.
• If the account has been transferred to the state, contact your state treasurer’s office to find out their procedure for reclaiming an account.
  

What to do with the money from a dormant bank account

Once you regain access to a dormant bank account, your next move is to figure out how to use the money constructively.

Consider needs and goals

Start by thinking about your needs and goals. Try to see the full picture. Consider both pressing needs as well as long-term goals and decide what the best use for the money is.

Range of alternatives

Once you’ve decided how you want to use the money, decide the best way to meet that goal. Here are some options:

• Checking accounts for near-term spending needs.
• Savings accounts for money you may need to access within a year.
• Certificates of deposit for holding money you won’t need for at least one to five years.
• Investment accounts for long-term wealth building.
• Paying down debt so you’ll pay less interest going forward.
  

Finally, having reclaimed the account, keep close track of it. Try to develop banking habits that will prevent you from having to go through the bother of reclaiming a lost account ever again.

Frequently asked questions

How long does it take for a bank account to become dormant?

Each financial institution sets its own policy on dormancy and inactivity, although state laws do play a role in determining when account is considered abandoned and can be transferred to the state through escheatment. In many cases, an account is considered dormant after one to five years of customer-initiated activity.

Do inactive accounts affect my credit score?

No. Unlike with credit accounts, opening or closing deposit accounts does not affect your credit score.

What if I had an account at a bank that no longer exists?

You should be able to trace the bank using the BankFind feature on FDIC.gov. This should allow you to identify both active and inactive banks. If you locate an inactive bank, it should provide a link to the next bank. You can then inquire with the bank about the account.