Do Closed Accounts Affect Your Credit Score?

Do Closed Accounts Affect Your Credit Score?

A closed account can affect your credit score in a variety of ways. First, closing down a credit account, such as a credit card can increase your credit utilization, which can drop your credit score. Second, closing down an account can make your credit mix less diverse, causing a drop in your credit score. Finally, closing an account can reduce your average age account age, which can also result in a decrease in your credit score. So, before closing an account, you should take all of these effects into consideration.

A closed account can affect your credit score even though it has been closed. If the account has a positive history, meaning you’ve made all your payments on time, it will positively affect your credit score and will remain on your credit report for ten years. However, if you were late on making payments on the account, the account will continue to negatively impact your credit score until it is automatically removed after seven years from the date that your first missed a payment on the account.

That said, although an account remains on your credit report for years, it’s impact will begin to lessen as the closed account ages and is eventually automatically removed from your credit report.

Increase in Credit Utilization

Closing down a credit card account can affect your credit score adversely because it reduces your credit utilization. Credit utilization in another way of describing how much of your available credit you’re using. You always want to keep your credit utilization as low as possible.

As a rule of thumb, you should never utilize more than 30% of your available credit. For the best possible effects on your credit score, you should strive to keep your credit utilization between 5% and 10%. If you use more than 30% of your available credit, you will harm your credit score.

When you close down a credit card account, you will lose some of your available credit, which could cause an increase in your credit utilization.

Imagine that you have $3,000 of debt and a total credit limit on your accounts of $15,000. Your current credit utilization will be 20%, which is below the 30% credit utilization you should maintain.

If you close down an old credit card that you don’t use that has a $6,000 credit limit, your total available credit would now be $9,000. Since you have a balance of $3,000, your credit utilization will be 33%, which can hurt your credit score since you’re above the maximum recommended credit utilization of 30%.

So, if you don’t want your credit score to drop, you should not close down a credit card account as closing your account can have a negative effect on your credit score.

Reduction of Your Credit Mix

Closing an account can have a negative effect on your credit score because it can reduce your credit mix. The credit reporting bureaus reward those who have a more diverse mix of credit accounts, such as credit cards, auto loans, home loans, and student loans.

When you close down an account, you are effectively reducing your credit mix, which can cause a small drop in your credit score since you’ll have a less diverse pool of accounts. So, if you want to maintain your credit score or improve it, you should avoid closing down accounts.

Lower Average Account Age

The third reason that closing an account can have a negative effect on your credit score is that it lowers the average age of the accounts on your credit report, especially if you’ve had the account for a long period of time. So, if you want to avoid a drop in your credit score, you should not close an old account that’s in good standing.

That said, while closing an old account that’s in good standing can initially lower your credit score, your credit score will likely rebound in a few months so long as you continue to make all of your payments on your other accounts on time.

Having said that, if you know that you’re going to apply for an auto loan or home mortgage, you should hold off on closing your account so that the closed account does not negatively affect your credit score.

When Should You Close an Account?

Here are a few situations where we believe that closing an account is an appropriate thing to do:

For example, if you have a credit card that has a hefty annual fee and the rewards provided by the credit card are not worth it for you, you should go ahead and close the credit card.

As an alternative to closing such a card, you should consider switching your account into a credit card that does not have an annual fee. Some banks and card issuers will transfer the account’s entire history to your new free account. So, ask about switching your credit card to a different one prior to closing it down.

A second situation where it may make sense to close an account is that if it’s a credit card with a high-interest rate and you plan on leaving a balance on the card, you might want to close your high interest rate account and open a card with a lower interest rate.

A third situation where it would make sense to close a credit card is if you’re trying to curb your spending and you don’t want to be tempted to spend money an open credit card.

Although you can just store your credit card away and leave the account with a $0 balance, some people can’t resist the temptation to spend money and find it better to just close down the account to avoid living beyond their means.

When Should You Keep an Account Open?

Here are a few situations where it would make sense to keep your account open:

You should keep your account open if it’s an old account, such as a credit card that you have had for a long time. Closing down old accounts that are in good standing is almost always a bad idea and should be avoided unless absolutely necessary.

This is so because having old accounts in good standing is great for your credit score. So, avoid closing down old accounts at all costs.

The second reason you should keep an account open is if you have a small number of accounts. To build your credit and improve your credit score, you need to have several accounts that are open and paid on time. So, if you only have one or two accounts, you should not close them down as this will hurt your credit score.

Alternatives to Closing Down an Account

If you’re considering closing down your account because the interest rate is too high, you should contact your card issuer and ask them to lower your interest, some card issuers are more likely than others to assist you with this task, so maybe your card issuer will assist you with lowering the interest rate.

If you want to close down your account because your credit card comes with a hefty annual fee, you should contact them to see if they can waive the fee for you. You’d be surprised at how many times this has worked for me.

In the event that the card issuer is unable to or refuses to waive your annual fee, you should ask them about converting your credit card into another card that does not have an annual fee. Converting your credit card into a different credit card will allow you to retain the credit history you’ve built with your original card.

If you want to close down your account because you’re afraid that you’ll get into debt if you leave your credit card open, you should ask your loved one to store it in a secure place that you don’t know about instead of closing down the account.

Regardless of the reason why you want to close your account, you should always consider alternative ways to solve your problem instead of closing down your account, especially if you’ve had the account for a very long time and has a positive credit history behind it.

Can You Remove a Closed Account from Your Credit Report?

Unless an account has inaccurate information or does not belong to you, removing it from your credit report is almost impossible regardless of whether it has positive credit history behind or negative history.

If your account was never delinquent and all of your payments were made on time, it will remain on your credit report for ten years and will positively affect your credit score.

However, if you missed payments on your account, your account will only remain on your credit report for seven years from the date you first became delinquent on the account.

Credit Score Planet Frequently Asked Questions

1. Can I have a closed account removed from my credit report?

You cannot removed a close account from your credit report unless your credit report contains inaccurate information about the account. If there is inaccurate information, you can dispute the account through the credit reporting bureaus’ dispute portal. However, if everything about the account is reported accurately it will be difficult, in fact, near impossible to have it removed from your credit report.

2. Why did a closed account drop my credit score?

Closing an account can cause a drop in your credit score for a variety of reasons that we discussed in much detail above. To reiterate, closing an account can drop your credit score because it may have increased your credit utilization, reduced the diversity of your credit mix, or because it reduced the average age of your accounts.

3. How long do closed accounts remain on my credit report?

A closed account with all payments fully made on time will remain on your credit report for 10 years. However, an account where you have missed payments will remain on your credit report for 7 years from the date your first became delinquent/late on the account.

4. How can I raise my credit score?

You can raise your credit score by making all of your payments on time, reducing the balance on your accounts and credit cards, keeping old accounts open, not applying for too many loans and credit cards accounts, and periodically checking and disputing any incorrect information on your credit report.