Are Closed Accounts Bad For Your Credit?

If you have closed a credit card, loan, or another account, you might be wondering whether a closed account is bad for your credit? We will provide you with everything you need to know on how closed accounts affect your credit and credit score.

Are Closed Accounts Bad For Your Credit?

The impact that a closed account has on your credit depends on the type of the account, and whether the account was in good standing at the time it was closed. For example, closed installment accounts that are in good standing are not bad for your credit. In fact, they will continue to have a positive impact on your credit score so long as they appear on your credit report. However, accounts that are closed in bad standing with negative marks, such as missed payments will have a negative impact on your credit score until they’re ultimately removed from your credit report after 7 years.

That said, closing a credit card account, can have a negative impact on your credit score because it reduces your available credit limit. Reducing your available credit limit could increase your credit utilization (how much of your available credit you’re using), causing your credit score to drop.

This occurs because your credit utilization accounts for 30% of your credit score. Whenever your credit utilization increases, your credit score drops. As a rule of thumb, you should keep your credit utilization below 10% and never exceed 30%. If you exceed 30% credit utilization, you will notice a significant drop in your credit score.

So, if you have a credit card and you barely use that credit card account, consider keeping it open because the available credit limit on your credit has the potential to decrease your credit utilization, the lower your credit utilization, the better your credit score will be.

That said, if you do not keep a balance on your credit cards, this means that you’re credit utilization is extremely low. In this scenario, closing your credit card account will have no impact on your credit score because your credit utilization will not increase.

Installment accounts impact your credit score differently from credit cards because they are not revolving accounts. So, closing an installment account has no impact on your credit utilization and therefore does not impact your credit score as does closing a credit card account.

Having said that, closing down an installment account, such as an auto loan may hurt your credit score because it has the potential to reduce your credit mix (diversity of accounts). That said, this may cause a slight drop of a few points, and your credit score will quickly recover so long as you continue making your payments on your other accounts on time.

Nevertheless, if you’re closing an account such as checking accounts or savings account, closing such an account will have no impact on your credit score. In fact, the status of your checking and savings account is not even reported on your credit report, so closing them has no impact on your credit score.

Why Do Closed Accounts Remain On Your Credit Report?

Closed accounts remain on your credit report to serve as a record, informing creditors and lenders as to how you’ve handled borrowing money in the past. You have three credit reports in the United States, one from each of the following: Experian, Transunion, and Equifax. The data in preserved in your credit report so that it can be used to calculate a credit score for you. Your credit score evaluates your creditworthiness to guide lenders who may inquire about your credit history when deciding whether to lend you money.

Does Closing a Credit Card Account Affect Your Credit?

Yes, closing a credit card can affect your credit score if you typically keep balances on your credit cards. This is so because closing a credit card account can increase your credit utilization. Increasing your credit utilization can lower your credit score. So, if you have a credit card that you rarely use but has good credit history, it may be worth it to keep your account open as it does have a positive impact on your credit score and can potentially lessen your credit utilization.

Does Closing a Checking or Savings Account Affect Your Credit?

Closing a checking, savings, or any other type of deposit account will not affect your credit score. This is so because the status of deposit accounts, such as checking and savings accounts is not reported to the credit reporting bureaus. As such, closing such an account has no impact on your credit score.

However, if you leave an unpaid balance on a checking or savings account, this could indirectly hurt your credit score. For example, if you leave a negative balance, your bank may sell the negative balance to a collection agency. The collection agency may cause significant damage to your credit score by adding a collection account to your credit report. A single collection account may cause your credit score to drop by 100 or more points. The higher your credit score, the bigger the drop will be.

To avoid this situation, you should contact your bank to ensure that the balance on your account is $0. This will help any negative balance from being sold to a collection account and damaging your credit score.

How Long Does a Closed Credit Card or Loan Account Remain On Your Credit Report?

A closed credit card or loan account that has been paid in full and has no negative marks will remain on your credit report for 10 years from the date the account was closed. However, if you have a credit card or loan that you’ve missed payments on, such an account will remain on your credit report for 7 years from the date you first missed a payment on the account. After the 7 year period, the account will automatically be removed from your credit report. If for any reason the account is not removed within the 7 year period, you should file a dispute to have the account removed from your credit report.

Can You Remove a Closed Credit Card Account or Loan Account From Your Credit Report?

No, you cannot remove a closed credit card account or loan account from your credit report unless the information being reported on your credit report is not correct. If the credit card account or loan account contains inaccurate information, you can file a dispute with the credit reporting bureau reporting the incorrect information to have it removed from your credit report.

The dispute process can take up to 30 days to complete. During the 30 day period, the credit bureau will conduct an investigation that involves contacting the furnisher of the information to determine whether the information is accurate or not. If the investigation reveals that the information is indeed incorrect, the credit bureau will remove it from your credit report. However, if the investigation reveals that the information is accurate, it will not be removed from your credit report.

For this reason, you should only dispute information that you reasonably believe is inaccurate because if the information is accurate, it will not be removed from your credit report.

Frequently Asked Questions (FAQs)

1. How long does a closed checking or savings account remain on your credit report?

Closed checking or savings accounts are not reported on your credit report, so there is no amount of time they remain on there.

2. What does “closed account” on your credit report mean?

The notation closed account on your credit report indicates that your account has been closed by either you or your lender. For example, if you’ve defaulted on your account, your lender may close the account without your permission. On the other hand, if you paid off the account, it may have been closed for this reason. There are many reasons why an account appears as closed on your credit report.

3. Do late payments on closed accounts affect your credit score?

Yes, late payments even on closed accounts will affect your credit score. So long as an account with late payments remains on your credit report, it will bring down your credit score. That said, as a closed account with late payments ages, its impact on your credit score will begin to lessen until it’s ultimately removed from your credit report after approximately 7 years.

4. How long does it take a closed account to be removed from a credit report?

For a closed account in good standing, it takes 10 years for the account to be removed from your credit report. For a closed account that has derogatory information, such as missed payments, the account will remain on your credit report for approximately 7 years from the date you first missed a payment or became delinquent on the account.