How Closed Accounts Impact Your Credit Report

cutting up credit card

By Eric Rosenberg

Your credit report and credit score are based on a wide range of information, and that’s not just limited to open accounts. Closed accounts stay on your credit report for up to a decade, and closing an account can have other implications for your credit score.

There are some times when closing a credit card or other credit account makes a lot of sense. But if you have a credit card with a perfect payment history and no annual fee, you are probably better off keeping it open. At other times, closing an account could hurt your credit.

Closing a credit card account or loan account is a complex decision. Before you close any account, make sure to understand how it will influence your credit score going forward. Here’s a rundown to help you out...

What is a closed account on your credit report?

Virtually any time you open a new credit account, the details of that account will be reported to one or more of the three major credit bureaus. Experian, Equifax, and TransUnion are the three big companies that monitor and store your credit data. When you close an account, the lender reports the closed account to the credit agency for its records.

Closed accounts happen for both good and bad reasons. You may have paid off a student loan or auto loan, for example, and the lender marked the account as closed and paid as agreed.On the other hand, some accounts may be closed for inactivity, having too many missed payments, or failing to pay off the loan entirely. In those cases, a closed account acts as a big negative mark that could affect your credit score.

Closed accounts still weigh into your credit score and remain on your credit report for up to ten years in most cases. Like most things related to credit, what happens in an instant will stay with you for years to come. That’s why you need to understand the ins and outs of closing an account by choice.

What happens to your credit when you close an account

Your credit score is based on a combination of factors. The second biggest factor in your credit score is your credit utilization, which makes up 30% of your score. After your on-time payment history, nothing is more important than your current credit balances.

Credit utilization

To calculate your credit score, the credit scoring models look at your total credit card balances in relation to your total available credit. Here’s an example to help you see how it works:

If you have one credit card with a $200 balance and a $1,000 limit and a second card with a $300 balance and a $1,500 limit, your total balances are $500 and your total limits are $2,500. In this case, your credit utilization ratio is 20% ($500/$2,500).

According to the CFPB, you should always aim to keep your credit utilization ratio under 30%. But the best credit utilization rate for your credit score is $0.

If you close an account, you lower the bottom number in the credit utilization ratio - A.K.A. your total available credit. That increases your credit utilization and harms your credit score.

With this in mind, the only time you should ever voluntarily close a revolving credit account is when it charges an annual fee and you don’t plan to use it. If you have a card with no annual fee, you should keep it open as long as possible to help your credit utilization.

Credit mix

Late payments and accounts with a negative history drop off of your credit report after seven years, according to TransUnion. But because late payments go away even if you keep the account open, it could be worth keeping even if you’ve made some mistakes in the past.

Accounts with only a positive history remain on your credit report for 10 years. But that is also a negative, as your account mix (more accounts is better in the long-term) makes up 10% of your score.

Installment loans like student loans and auto loans work differently. With those accounts, simply paying on-time every month is good for your credit. If you can pay it off early and save money on interest, you generally should.

If your problem involves racking up too much debt on your credit card, try putting it in a drawer out of sight for a while, and only take it out for planned purchases or emergencies.

Average age of credit

Finally, closing an account affects your average age of credit. Keeping accounts open for a long time shows you can manage them responsibly. When you close an account, it stops aging. When it drops off of your account, you lose all benefits from having had the account open and in good standing.

Your average age of credit makes up 15% of your credit score. When you add these three factors together (credit utilization, credit mix and credit history), they make up over half of your credit score. So keep that in mind when thinking about closing a credit account.

More accounts are better when handled responsibly

In general, a larger number of accounts is better for your credit. I have more than ten credit cards and a mortgage, and my credit score is well over 800 and the best score I’ve ever had. Having a lot of accounts is good for my credit only because I handle them responsibly.

Using credit cards is a great way to earn valuable cash back and travel rewards. The key to doing so successfully is following the most important rule of credit cards: Pay your balance every month in full by the due date.

I was lucky to learn that tidbit from my history teacher, Mrs. Waples, during an off-topic class discussion in high school. But most people don’t learn anything about credit in school.

So I’m sharing three key credit tips with you now:

  • From this day forward, never miss a payment due date.
  • Work to pay off your balances completely.
  • Never spend more on credit cards than you can afford to pay in full each month.

For many people, that’s easier said than done. That’s why it’s important to understand your own credit habits and use tools like automatic payment. Another option is just to leave your credit cards in the back of a drawer for emergencies. Just make sure you use them a few times a year to keep them active.

If you can manage them responsibly and hold onto them, however, more accounts could be better for your credit. Closing an account, even one you don’t regularly use, is rarely in your best interest.

Look for closed account errors on your credit report

Around 20% of people have an error on their credit report, so there is a good chance something is wrong on yours. One common error is the account open/closed status, among other errors. Many errors are not in your favor and could harm your chances of getting approved for a new credit card or loan account in the future.

That’s one reason it’s a good idea to check your credit report regularly. You can get your credit report for free from AnnualCreditReport.com, a government-mandated website. You can also use free credit score apps like Credit Karma and Turbo, which offer your credit score and report for free. If you find any errors, you can file a dispute with the respective credit bureau for a remedy.

In most cases, you cannot remove accurate information from your credit report, including closed accounts. You can send a written request or call the lender to remove an account from your credit report, but that decision is ultimately at their discretion.

Close accounts with care

Closing credit accounts makes sense when trying to avoid an annual fee or when leaving a credit card (or credit card issuer) you really don’t like. But when you have a say in the matter, you should typically try to keep your accounts open as long as possible if your credit score is the primary factor for you.

Sometimes, it may be worth a small ding to your credit to close an account. If you have a large number of accounts, closing one has a smaller weight than someone with just one or two. If closing an account will save you money, that is usually worth more to you than a mild change to your credit.

If you are going to close an account, that is okay. Just make sure you are doing it for the right reasons and doing your best to minimize any negative impact on your credit.

About the author

Eric Rosenberg is the mastermind behind the Personal Profitability blog and podcast. He has both an undergraduate degree and a MBA in finance and his work has appeared in various media outlets.

Written on May 2, 2019

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@selflender.com.

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