Do Closed Bank Accounts Affect Credit Score?
Can Closed Bank Accounts Impact Your Credit Rating
There are times when closing an account can affect your credit scores such as when you close a bank account. However, it is worth noting that merely closing a bank account does not necessarily hurt the scores in most instances. Before we continue it is important to note the following regarding how closed accounts can indirectly impact credit.
How Closing An Account Affects Your Credit Utilization?
Another way through which one can lose score points by closing a credit card or any other loan account is by credit utilization ratio. A total credit utilization ratio compares the total outstanding balances to the total credit limit on all the accounts. It is advisable to keep credit utilization below 30% which is a consensus among different financial experts.
If you have an account that remains open but with an available credit limit, closing it will reduce your overall total credit limit. If you have balances in other accounts, the absence of the credit limit from the closed account will increase your credit utilization ratio. For instance, let’s say your total balance is $5,000 and you decide to shut down a card with a $10,000 credit limit. This could be detrimental to your credit scores.
Lenders are likely to deem the higher the ratio of your utilization as posing a higher risk of defaulting on your obligations. Keeping the credit utilization ratio very low is good as it shows responsible credit usage and the ability to handle more credit lines. Therefore, credit utilization is one of the factors that significantly affect your credit scores.
Important factors that help minimize the impact of closing an account.
- The second strategy involves paying off balances before closing the account.
- Consequently, they entice customers to open a new account with them at a similar or even greater credit limit.
- An account rarely has a very low level of utilization right before its closure.
If there are no other accounts with balances, closing one account would have no dice effect on utilization and credit score. It is only important to be careful not to allow the utilization ratios to creep into the risky percentages.
Closed Accounts are Not Deleted from the Credit Report
It must be noted that even if you have closed your credit card or loan account, it will still be reflected in your credit reports for several years. The accounts that were closed in good standing stay on your credit file for 10 years from the time the account was closed.
This means that the closed accounts will also be taken into consideration when it comes to determining the average age of your credit history. A larger average age is generally better for credit score, while its length is evidence of more risk for the lender. So, as long as the closed account was in positive standing I did not make any payments late before I closed it, it will continue to increase the positive impact on the credit score as the age of the account increases over time.
A closed account that has been reported as severely delinquent or charged off will remain on the credit report for 7 years starting from the missed payment that caused the account to be closed. However, if the closed account has no other record of late payments, it will be on credit reports for 10 years without affecting credit scores in the least.
Other Factors With Closed Accounts
There are a few other details around closed accounts to keep in mind as well.
If an account is closed by the lender due to inactivity, the non-payment of dues, or for any other reason, it may appear “closed by credit grantor” on the credit report. Under these circumstances, this could hurt scores depending on the details.
If you choose to shut an account that is paid on time then the account status will be ‘Closed by consumer’ and does not reduce scores. This proves that it was closed intentionally by you without any cases of delinquency being recorded.
Leaving it open results in a higher average age of accounts than when the company closes it to record the transaction. This could, in turn, slightly reduce credit scores – although not as much as would be the case with a direct impact on credit history.
The frequent accounts that have been closed recently might be perceived as risky from the aspect of the potential lenders analyzing the reports.
Like any factor concerning credit reports and scores, details of the reports and profiles of the concerned individuals are taken into consideration. However, some accounts closed with no negative remarks will be closed with very little, if any, effect on credit score. The positive effects include being able to regularly check on the credit utilization ratios and the average age of accounts so that if they change when one closes a credit account it can be dealt with.
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