How Will Closing Old Accounts Impact My Credit Score?

Closing an old account may seem like a simple financial decision. However, its impact on your credit score is complex and varies based on your individual credit profile. Understanding how credit scores are calculated and the factors influenced by account closures is important for making informed choices. This article explores how closing an account can affect your credit score and offers guidance.

How Credit Score Factors Are Influenced by Account Closures

Closing an old account can affect several key components of a credit score, with the most significant impacts typically seen in credit utilization and the average age of credit history. Credit scoring models, such as FICO and VantageScore, assess these elements to determine creditworthiness. A positive payment history remains on a credit report, but other factors can shift.

The age of credit history considers how long your credit accounts have been open, focusing on the average age of all accounts. Closing a very old account, especially one that significantly contributes to a long average, can reduce the overall average age of your open accounts. While closed accounts in good standing remain on your credit report for up to 10 years, their impact on the average age of open accounts diminishes. This can potentially lead to a score reduction, as this factor typically accounts for 15% to 21% of a credit score.

Credit utilization is a major factor, representing the ratio of total credit card balances to total available credit. Closing a credit card, especially one with a substantial credit limit, reduces your total available credit. This instantly increases your credit utilization ratio on remaining cards, even without new debt. For example, if you have $2,000 in debt across cards with a combined $10,000 limit (20% utilization), closing a card with a $3,000 limit reduces total available credit to $7,000, raising utilization to approximately 28.5%.

A higher utilization ratio, particularly above 30%, is viewed negatively by credit scoring models and can significantly lower your score. This ratio is a significant factor, accounting for 20% to 30% of a credit score.

The credit mix, which refers to having a blend of different credit types like revolving credit (credit cards) and installment loans (mortgages, auto loans), influences a credit score. While a less impactful factor, accounting for about 10% of a FICO score, closing a specific type of account, such as your only installment loan or oldest credit card, could subtly alter this mix. Lenders prefer to see that you can responsibly manage various forms of credit. The impact on credit mix is less pronounced compared to changes in credit utilization or average account age.

Payment history, which tracks a record of on-time or late payments, is the most significant factor in credit scoring, typically comprising 35% to 40% of a score. Closing an account does not remove its payment history from your credit report. Positive payment history from a closed account remains on the report for up to 10 years, continuing to contribute positively. Any negative payment history, such as late payments, will remain on the report for up to seven years.

Steps to Take Before Closing an Account

Before deciding to close an old account, take several preparatory actions to understand the potential impact and mitigate negative consequences. A thorough review of your current credit information provides a clear picture of your financial standing. This approach allows for informed decision-making regarding account closures.

Begin by obtaining and reviewing a current credit report from each of the three major credit bureaus: Experian, Equifax, and TransUnion. This can be done for free annually through AnnualCreditReport.com, the official, federally authorized website. Reviewing the report helps in understanding existing account ages, credit limits, and current balances, as well as identifying any inaccuracies. This step provides a baseline for evaluating how closing an account might shift these metrics.

Evaluate your current credit utilization across all revolving accounts. If your current utilization ratio is already high, closing an account with an available credit limit could worsen this ratio, as your total available credit would decrease. It may be beneficial to pay down existing balances on other credit cards before closing an account to maintain a lower overall utilization. Experts often recommend keeping total credit utilization below 30%.

Consider the age of the account intended for closure relative to other open accounts. If it is one of your oldest accounts, closing it could reduce the average age of your credit history, negatively affecting your score. Keeping older accounts open, even with infrequent use, often supports a longer credit history.

Transfer any recurring automatic payments or subscriptions linked to the account slated for closure to another active account. This prevents missed payments, potential fees, or service interruptions.

Redeem any accumulated rewards, points, or cash back associated with the account before initiating its closure. Many card issuers stipulate that unredeemed rewards are forfeited upon account closure.

Finally, contact the financial institution directly to formally close the account. Confirm that the balance is zero before requesting closure. It is advisable to ensure the account is reported to credit bureaus as “closed by consumer” or “closed at consumer’s request,” rather than by the lender, as this phrasing can be more favorable.

Monitoring Your Credit After Account Closure

After an account has been closed, ongoing vigilance is important to ensure the closure is accurately reflected on credit reports and to track any changes to your credit score. This monitoring helps in promptly addressing any discrepancies that may arise. Maintaining responsible credit habits after the closure is also key for long-term credit health.

Obtain an updated credit report approximately 30 to 60 days after the account closure from each of the three major credit bureaus. This allows for verification that the account status is correctly reported as “closed” and that there are no unexpected changes to other account information. Regular review helps confirm the accuracy of reported data.

Monitor credit score changes using free credit monitoring services often provided by credit card companies or other financial institutions. These services can alert you to fluctuations in your score and provide insights into the reasons for these changes. Tracking your score over time helps in understanding the real-world impact of the account closure.

Should any inaccuracies or errors appear on your credit report related to the closed account or any other accounts, dispute them promptly. The Fair Credit Reporting Act (FCRA) grants the right to dispute incorrect information with both the credit bureau and the entity that provided the information. Disputes can be initiated online, by phone, or by mail with each credit bureau.

Continuing responsible credit habits, such as making all payments on time and keeping credit utilization low on all remaining open accounts, remains paramount. These practices consistently contribute to a healthy credit score regardless of past account closures.