Do Closed Accounts Affect Your Credit Score?

Credit scores are derived from credit reports and provide a numerical representation of your credit status. It means that any of the changes regarding your credit history will affect your score, either positively or negatively. One question that often comes up is: ‘Does a closed account impact your credit rating?’ The short answer is yes, closing an account usually results in activity on your credit report that will impact your score. Here is a detailed explanation of how closed accounts affect your credit score.

What Happens if I Close an Account?

Should you choose to close a credit card, any kind of credit, or loan account, the account is not immediately deleted from credit records. It will just show as "closed," even though it will remain displayed on your credit records as inactive and without a balance revolving on it.

Until it is deleted from your credit reports, the closed account will stay active and will be included in the evaluation of your credit ratings. Generally speaking, the blacklisted closed accounts show up on credit records for ten years following their closure. This makes them qualified to show your credit ratings for ten years following the closing of the accounts.

One of the best strategies to lower specific account holder risk of fraud and minimize losses is closing an outdated account.

Closing your oldest credit card account could cause a significant immediate credit score drop. Your FICO credit score is 30% based on credit use; length of credit history accounts for 15%. Closing the oldest account can drastically shorten the average length of the accounts you maintain. This can negatively affect your credit, particularly if your credit background is not very long.

For instance, you opened your second credit card in 2020 and your first one in 2015. Usually, one needs five years to have an account with the company. Your average age falls to 2 years instead if you close that older account. This causes your credit history length and score to plummet like a hefty anchor.

Consequences of an account being closed

Beyond the initial impact of changing your average account age, a closed account can affect your credit in a few key ways over time:

1. Credit utilization – It is beneficial to have credit accounts that have high credit limits and low credit limits are beneficial to your credit score since they help keep the credit utilization ratio low. This is because when you close an account particularly one with a high credit limit you find your overall credit utilization ratio going up. This can in turn nib on your credit score and thus it is important to avoid carrying around large balances.

2. Credit mix – It is preferred if you have credit cards and other loan accounts like car loans, house loans, student loans, etc. If closing a loan account leaves you with only credit cards, your score is likely to be slightly lower.

3. No more credit history – Generally, credit accounts that have been closed while still being in good standing remain on the reports for the next 10 years. However, after a decade, the account will be left out and so will the entire payment history. This can reduce your credit history and drop your scores a bit but not very significantly.

Measures That Can Reduce the Effects of Closed Accounts

If you’re worried an account closure could damage your credit, there are a few things you can do to help offset the effects: If you’re worried an account closure could damage your credit, there are a few things you can do to help offset the effects:

• Do not close accounts – It is advisable to keep your older accounts active even if you may not be using them anymore. You can contact the issuer to make the card inactive for any new purchases but should allow the account to remain open and the history reported to the credit bureaus. This maintains the generality of history for the improved scores that are needed by your company or institution.
• Pay balances down first – Before closing an account, pay balances down as far as possible while keeping the overall utilization moderate. This helps reduce some of the traffic spikes that you would get when the account is out of your reports.
• Open a new account first – It is best to open a new account several months before closing an old one. This allows it to begin the aging process and extend your length of history so that the closure impact is reduced.
• Distribute the closure of the accounts – If you have to close multiple accounts, do so gradually rather than all at once. This allows age and utilization to come to normal instead of shocking your scores.

A Final Word on Closed Accounts

Closing an old credit card account or loan account has an impact on the credit score, at least a small one, particularly in the case of older accounts. But for some credit cards such as those with high annual fees that one intends to cancel or accounts that one fears may have been compromised to identity theft, it is advisable to maintain the card despite the slight reduction in score. Just be careful which and when you close them and counterbalance the consequences with the other beneficial actions. After the account has been closed for some time, the impact is likely to reduce if you remain using credit.

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