If You Close an Account With Late Payments, What Happens?

Closing an account with a history of late payments has specific financial implications. Understanding the consequences involves examining how late payments are recorded, what happens to the debt itself, and the long-term effects on one’s credit profile.

Late Payments and Credit Reporting

A payment is considered late when not received by the creditor on its due date. While a payment missed by a few days may incur a late fee, it does not immediately impact one’s credit report. Creditors usually report a payment as late to the major credit bureaus—Experian, Equifax, and TransUnion—once it becomes at least 30 days past due.

Once reported as 30 days late, a payment becomes part of the individual’s credit history. Delinquency severity increases with time, categorized as 30, 60, 90, 120, 150, or 180 days past due. This information is used by credit scoring models, such as FICO and VantageScore, to calculate a credit score. A single reported late payment can significantly reduce a credit score.

Closing an Account: What It Means for Late Payments

Closing an account with previous late payments does not erase those delinquencies from a credit report. Historical payment information, including any reported late payments, remains on the credit report even after the account’s status changes from “open” to “closed.” This means that past financial missteps continue to be visible to future lenders.

Closing an account primarily prevents new charges or future late payments on that specific account. It does not retroactively fix or remove any negative reporting that has already occurred. The established payment history, including any derogatory marks, will continue to be reflected in credit reports for an extended period.

The Remaining Debt Obligation

Closing an account does not eliminate the outstanding debt owed to the creditor. The individual remains legally obligated to repay the full balance on the closed account. Creditors will continue collection efforts.

If the debt remains unpaid, the original creditor may pursue collection activities directly or sell the debt to a third-party collection agency. These collection agencies will then attempt to recover the debt, often adding their own fees and interest. For larger debts, creditors or collection agencies may initiate legal action to obtain a judgment, which can lead to wage garnishment or liens on assets.

Impact on Your Credit Score Over Time

Reported late payments remain on an individual’s credit report for up to seven years from the date of the initial delinquency. This seven-year period is mandated by the Fair Credit Reporting Act (FCRA). Even if an account is closed or the debt is paid off, the late payment record stays on the report for this duration.

While late payments have a substantial initial impact on credit scores, their influence diminishes as they age. Newer payment history carries more weight in credit scoring models than older information. However, the presence of a closed account with late payments can still affect future lending decisions, as it provides a historical record of payment behavior. After the seven-year period, the late payment information is removed from the credit report.