Does a Closed Account Hurt Your Credit?

A closed account refers to a credit account that is no longer active and cannot be used for new charges. Reasons for closure include paying off a loan, a cardholder’s request, or a creditor closing it due to inactivity or negative activity. While an account is closed, it still appears on your credit report for an extended period, and its status at closure influences your credit profile.

How Closing an Account Affects Credit Utilization

Closing a revolving credit account, such as a credit card, directly impacts your credit utilization ratio. This ratio compares your current credit usage to your total available credit across all revolving accounts. A lower credit utilization ratio is viewed favorably by credit scoring models, signaling responsible credit management.

Closing a credit card removes its available credit limit from your total available credit. If you maintain balances on other cards, this reduction increases your credit utilization ratio, even if your debt remains the same. For instance, if you have $7,000 in debt across multiple cards with a total available credit of $25,000, your utilization is 28%. If you close a card with a $12,000 limit, your total available credit drops to $13,000, and your utilization jumps to 54%, which negatively affects your credit score.

This increase in the utilization ratio results in a temporary dip in your credit score because it suggests a higher reliance on credit. The impact is more pronounced if you have few other open accounts or if the closed card had a substantial credit limit. Maintaining low balances on your remaining cards or increasing their credit limits can mitigate this effect after an account closure.

How Closing an Account Affects Credit History Length

Credit scoring models consider your credit history length, including the age of your oldest and average account age. A longer credit history indicates more experience in managing credit, which positively influences your credit score. Conversely, a shorter credit history suggests less experience and is a higher risk to lenders.

Closing an older account, especially one of your longest-standing ones, can shorten the average age of your accounts. This action negatively impacts your credit score because it reduces the overall reported length of your credit relationships. For example, if your oldest account is closed, it can remove years of positive payment history from the active calculation of your average account age.

However, closed accounts with a positive payment history remain on your credit report for up to 10 years from the date of closure. During this period, these accounts continue to contribute to your credit history length and positively reflect your past responsible behavior. The active contribution to available credit ends immediately upon closure, but the historical data remains for a significant time, influencing the credit history factor.

How Account Status at Closure Influences Impact

The effect of a closed account on your credit score depends on its status when it was closed. An account closed in good standing, meaning it had a history of on-time payments and no outstanding balance, will have a different impact compared to an account closed due to negative activity.

If an account was closed in good standing, such as a credit card you paid off and then requested to close, it remains on your credit report for up to 10 years. This prolonged presence allows its positive payment history to continue benefiting your credit score, demonstrating a track record of responsible financial behavior. The impact on your credit score from closing such an account is minimal or temporary, especially if you have other active accounts.

In contrast, an account closed due to negative activity, such as a charge-off, collection, or a lender-initiated closure due to delinquency, will have a more negative and lasting impact. Negative information, including late payments and accounts sent to collections, remains on your credit report for seven years from the date of the original delinquency. Even if the account is closed, these negative marks will continue to weigh down your credit score for that duration, although their impact may diminish over time.

Differences Between Revolving and Installment Accounts

The impact of closing an account differs based on whether it is a revolving or an installment account. Revolving accounts, like credit cards or lines of credit, allow you to borrow, repay, and borrow again up to a set limit. Installment accounts, such as car loans, mortgages, or personal loans, involve borrowing a lump sum and repaying it with fixed payments over a set period until the loan is paid in full.

For revolving accounts, closing a credit card primarily affects your credit utilization ratio by reducing your total available credit. This leads to an immediate, though often temporary, increase in your utilization and a potential dip in your score. The length of credit history and credit mix is also affected, especially if it’s an old or one of your few revolving accounts.

Conversely, paying off and closing an installment loan does not negatively impact your credit score. Once an installment loan is paid off, the account naturally closes, and this demonstrates successful debt management. This positive payment history remains on your credit report and contributes to your credit history. While the credit mix might change if it was your only installment loan, this factor has a less significant effect on credit scores compared to credit utilization or payment history.