Does a Closed Account Hurt Your Credit Score?

Closing a credit account raises questions about its effect on your credit score. The impact is not always straightforward, as it depends on how credit scores are calculated. Understanding these nuances is important for managing your financial standing. This article explores how a closed account can influence your credit report and score.

How Credit Scores Are Affected by Closed Accounts

Closing an account primarily influences your credit score through its effects on credit utilization and the length of your credit history. Credit scoring models analyze these aspects to gauge your financial behavior.

Credit utilization, the amount of revolving credit used compared to your total available revolving credit, is a significant factor in credit scoring, often accounting for approximately 30% of your FICO score. When a revolving account, such as a credit card, closes, your total available credit decreases. This can increase your credit utilization ratio, even if your outstanding balances remain the same.

For example, if you have two credit cards, each with a $5,000 limit and a $1,000 balance, your total available credit is $10,000, and your utilization is 20%. Closing one card reduces your total available credit to $5,000, immediately raising your utilization to 40% with the same $2,000 balance. A higher utilization ratio signals increased risk to lenders, potentially decreasing your credit score.

The length of your credit history also plays a role in your credit score, making up about 15% of your FICO score. This factor considers the age of your oldest account, your newest account, and the average age of all your accounts. Closing an older account can reduce the average age of your credit accounts, negatively affecting your score, particularly if it was one of your longest-standing accounts. Lenders view a longer credit history with responsible usage as an indicator of financial stability.

Your credit mix, while less impactful than utilization or history length, is also a consideration. Credit mix refers to the diversity of your credit accounts, such as revolving credit (like credit cards) and installment loans (like mortgages or auto loans). Closing an account might alter this mix, though its effect on your score is minor. Lenders prefer to see that you can manage different types of credit responsibly.

Impact of Different Account Types When Closed

The type of account you close can have varying effects on your credit score. Revolving accounts and installment accounts function differently, and their closure impacts credit metrics. Understanding these differences is helpful for managing your credit profile.

Closing a revolving account, such as a credit card, can have an immediate and noticeable impact on your credit utilization. These accounts provide a line of credit that you can use, repay, and reuse. When a credit card is closed, the associated credit limit is removed from your total available credit, which can cause your credit utilization ratio to rise. Additionally, if the closed credit card was one of your older accounts, its closure can reduce the average age of your credit history, potentially lowering your score.

Installment accounts, such as mortgages, auto loans, or student loans, differ from revolving credit because they involve a fixed loan amount repaid over a set period. Paying off these loans has a positive or neutral impact on your credit score, demonstrating successful debt reduction and responsible repayment. Unlike revolving accounts, installment loans do not directly affect your credit utilization ratio, as their balances are not part of the revolving credit calculation.

What Remains on Your Credit Report

Even after an account closes, it does not immediately disappear from your credit report. The duration a closed account remains depends on its payment history, providing lenders with a comprehensive view of your past credit behavior.

Closed accounts with a positive payment history can remain on your credit report for up to 10 years from the date of closure. This continued presence benefits your score by contributing to your overall credit history and demonstrating responsible credit use. Lenders consider this historical data when assessing your creditworthiness.

Conversely, closed accounts with negative marks, such such as late payments, missed payments, or accounts that went to collections, typically remain on your credit report for approximately seven years from the date of the original delinquency. While these negative entries will continue to harm your score for the duration they are reported, their impact may diminish over time. The presence of such information emphasizes the long-term consequences of payment history.