Your credit report includes an assessment of your credit history. Previous spending and repayment habits help credit bureaus assign you a score that reflects your reliability to banks and other companies. But how do closed accounts figure into this?
What Is a Closed Account?
Credit card accounts that have been closed show up on your credit report as closed accounts. It may show up differently on your report depending on how the account was terminated. Accounts may be ended by the bank, or by you.
Credit reports often specify if the account was closed by the credit grantor, which may happen in the case of inactivity, fraudulent activity, and card theft or loss. It may also be closed if the bank no longer offers that particular type of account.
Customers may also terminate their credit cards for a variety of reasons. If you choose to end your relationship with a particular bank, or the annual fee increases, you may terminate your account.
Can You Have Good Credit With Closed Accounts?
Even if you have many closed accounts without active ones to counterbalance, it is possible to have good credit. It all depends on how you used them when they were active.
How Do Closed Accounts Affect Credit?
Closing an account can have a few effects on your credit. When an account closes, it changes the amount of available credit you have. For example, if you close an account with a $1,000 credit limit, your available credit is decreased by $1,000.
This also affects your utilization ratio. This means that if you usually put a certain amount of money on credit cards, and you close one of them, you may end up putting more on the cards that are still open. A low utilization ratio is preferable, so try to pay off some of the balances on other accounts before closing a card.
Another aspect of credit people often wonder about is your credit age. Many people have heard that once you close an account, it no longer counts toward your credit age. An older account makes consumers look more responsible and experienced, so a higher credit age is desirable. Closing accounts does not remove them from your credit report, however. In fact, their ages can still increase once they are closed. An account’s age is considered from the day you opened it, and it can only get older. This is good news for anyone who wants to close an old account that has become a poor fit.
Is It a Good Idea to Remove Closed Accounts from Your Credit Report?
Closed accounts don’t necessarily hurt your credit. Accounts that were in good standing when they were open reflect positively on you, and can benefit your credit. Good standing accounts will automatically be removed from your credit report after 10 years, and delinquent accounts are removed after 7 years.
If a closed account is being reported by a credit bureau with inaccuracies, you can request an update or removal. For this, you’ll need to contact individual credit bureaus and ask that they either change the information to be correct, or remove it entirely.
When Can Closed Accounts Have a Negative Effect on Credit Scores?
Though many types of closed accounts have a neutral or even positive effect on your credit score, accounts in poor standing can continue to haunt you after you have closed them. Delinquent accounts affect credit scores negatively. If an account is closed as a result of delinquency, it may still be hurting your credit. A closed account with a balance still owed can be very bad for your credit.
The effect is either that the account is treated the same way as an open account, leading to a high utilization ratio, or that the account is considered maxed out. It’s likely that the effects differ between bureaus, but neither is a desirable result.
If you have a closed account with a balance on it, call the bank and see if the bill has been sent to collections yet. If it hasn’t, you can improve your credit by paying the balance off. If it has, you should seek financial advice that is tailored to your situation.Closed accounts don’t have to mean bad news for your credit score. Take the Tradeline Assessment to see how Coast Tradelines can help you reach your financial goals and improve your credit.