Do Closed Credit Cards Affect Credit Score?

Credit cards that have been closed may impact credit scores.

A credit score is one of the key metrics that creditors rely on when deciding whether to advance their credit. One of the greatest benefits of having a good credit score is the ability to secure the most favorable loan interest rates and repayment terms. But what does it do to your credit score when you decide to close some of the credit card accounts that you have been using for several years? Does closing credit cards negatively affect credit rating?

The effect of closing credit cards on credit utilization

Credit use is the second most important factor affecting credit score calculation. This was defined as the degree to which you charge your credit card to the overall credit limit supplied. Usually, the ideal strategy would be to aim for a credit use ratio of less than thirty percent. In this instance, your credit score will be higher the lower the numbers are.

Closing a credit card account results in a general reduction in your available credit level. Your credit use rate so rises if you have balances on your other credit cards. For example, imagine your outstanding debt is $1500 and you have three credit cards, each with a $1000 limit, hence your total credit limit is $4000. If you have five credit cards and a $1500 amount, for example, your credit use is thirty percent. Should you close one of the credit cards, your credit use rate drops from 30 percent to half with only $5000 of credit available.

Your credit score suffers when your credit use ratio suddenly increases; the effect is much more pronounced if you are moving from a low credit use to a high one. Your credit score is more at risk the closer your use is toward the limit of your cards.

Consequences for the Credit History Duration

Apart from the credit utilization ratio, credit scoring models also consider the average credit age of your accounts. Ideally, the longer the credit history, the better. All the credit cards that are closed will decrease the average length of credit history and therefore lower your credit score.

However, the effect may not be so much if you still retain other old accounts. For instance, if you have a 6-month-old retail card and you made the decision to close it but you still have active credit card accounts that were opened 5+ years ago, your long active accounts will still be helping your credit score in the category of length of credit history.

When Closed Accounts Disappear From Your Credit Report?

However, the closed credit card accounts are reported for up to 10 years to credit reporting bureaus. These closed accounts will still be taken into account in the average age of credit history while in this period. However, they can also affect your credit score positively or negatively in the short term depending on your credit utilization once the balances are paid.

This way, a closed account that is no longer reported after 10 years will not affect your credit score in any way. However, it is at this point that a closed account will stop contributing to credit in terms of credit history length. On the flip side, this also implies that if the closed account was a maxed-out account or had other negative remarks, those shall have been wiped off at this point as well.

Measures to Avoid the Negative Impact of Closed Accounts on Credit Score

If you do need to close some old credit card accounts, there are a few strategies you can use to help minimize damage to your credit scores.

It is advisable to pay off credit card balances first. When closing an account, it is recommended to pay as low balances as possible on all credit cards. Keep credit card balances as close to zero as possible to ensure that your credit utilization ratio does not skyrocket immediately after account closure. Distribute the remaining balances across cards to maintain low card and overall usage.

Do not delete the oldest accounts. They have suggested that you should do your best not to cancel your oldest credit card accounts if you have paid your credit card balances in full and if your credit card companies do not charge you an annual fee. Maintaining those accounts will still help with the age descriptor of your credit history. It is more advisable to close newer accounts first that do not affect the credit history much.

Get a new credit before closing Another way of mitigating the negative score effects of closing an account is by opening a credit card before closing the older one. This can be useful to keep or even reduce your overall credit utilization, which is a factor used by credit scoring models. Just ensure that you use any new credit wisely and properly.

Have patience for your credit to come back It is wise to make some time for your credit to be restored and to ensure that any new credit line that you requested is removed before applying for costly loans. In other words, during this rebound period, it is wise not to apply for any new credit, as one is likely to be rejected. Check your scores and wait for them to recover before you take out new loans.

Request Creditors to Reopen Closed Accounts If you have not reported a specific credit card account as closed for more than 3 months, you may also be able to request the credit card company to reopen the account. This can quickly increase the credit back to the time before the closure of the account by simply reopening it. It is important to note that creditors are not obliged to reopen accounts though.

How Long Do Closed Accounts Affect Your Credit?

The short answer – closed accounts can affect your credit score for as long as 10 years and they will be visible in your credit reports. However, this impact is only temporary and normally fades as time progresses, thereby not having as much of an influence on your scores. When an account that was previously closed is removed from your credit reports, it will not impact your score anymore.

A credit score is most vulnerable to decline when you have high credit utilization and owed balances on the closed account during the first couple of years after closing an account. If there is still some activity on the account when it is closed, the initial score drop usually recovers in 6 months to 2 years for the other accounts as you continue to reduce balances on them and the closed accounts’ age on your reports. So just wait and keep doing the right things with credit cards, and credit will be able to fully heal after accounts have been closed.

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