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Understanding the Impact of Closed Accounts on Your Credit

When a loan or credit card account is closed, it doesn’t simply vanish from your credit reports. An account can stick around for as long as 10 years and, depending on the nature of the account and the reason it was closed, it can help or hurt your credit scores as long as it persists. Here’s how long it takes for an account to be deleted from your credit report, and why it matters.

How Closed Accounts Affect Your Credit

Credit reports chronicle your history of debt management, and payments on both open and closed accounts are part of that history. Closed accounts may remain on your credit reports for seven to 10 years, and can help or hurt your credit over that time depending on how you managed the account when it was open.

Closed accounts with no late payments: If you made all your payments on time (or at least within 30 days of the due date), closed accounts can remain on your credit report for up to 10 years from the date they were closed. That’s good news, because a record of timely payments will benefit your credit scores, whether the account is open or not.

Closed accounts with missed or late payments: On the other hand, if your payment history on a closed account includes missed or late payments or, worse, if the lender closed the account because you didn’t keep up with payments, those negative entries will stay on your credit reports for seven years. They will have some negative effect on your credit scores as long as they remain, but their impact will diminish with time. If your account was delinquent when it was closed, it will remain on your credit report for seven years from the date it first became past due without being brought current.

Choosing to close a credit card account with a history of steady payments does no direct harm to your credit scores. Neither does the closure of an account because of inactivity, which can happen if you’ve gone a year or more without using a credit card. But closures such as these could cause indirect harm to your credit scores in a few ways.

Increased Utilization

Closing a credit card account reduces your overall borrowing limit, so if you have balances on any other credit cards when an account is closed, your credit utilization ratio—the percentage of your total borrowing limit represented by the balances on your cards—increases. Utilization ratio is a significant factor in determining credit scores, and the lower your utilization, the better.

To illustrate the potential utilization impact of closing a credit card account, let’s say you have three credit card accounts, with credit limits of $2,000, $3,000 and $5,000. If your only balance is $1,500 on the card with the $5,000 limit, your overall utilization ratio is $1,500 / ($2,000 + $3,000 + $5,000), or 15%.

If you then close the account with the $3,000 borrowing limit, your utilization ratio becomes $1,500 / ($2,000 + $5,000), or 21%. Without running up any new charges, your utilization has increased, which can hurt credit scores.

Reduced Credit Mix

Credit scoring systems such as the FICO® Score and VantageScore® tend to favor borrowers who successfully manage multiple types of personal credit—installment loans like auto loans and mortgages, and revolving accounts such as credit cards. Eliminating a credit card account could reduce your “credit mix,” which can have a negative influence on credit scores.

(Eventual) Reduction in Age of Accounts

Credit scoring systems also tend to favor borrowers with years of experience managing debt and repayment. All other considerations being equal, a borrower with a longer credit history will tend to have higher credit scores than one with a shorter history.

Scoring software encapsulates this experience by considering the ages of all the accounts on your credit report. So, after you close an account and it eventually falls off your credit reports, you’ll no longer get credit for the age of that account. Of course, by then you’ll have seven to 10 more years of credit history under your belt, so the score impact probably won’t be severe. But it’s something to consider, especially if you’re considering closing one of your oldest accounts.

How Long Do Closed Accounts Stay on Your Credit Report?

Generally speaking, if an account’s payment history helps your credit score, it will stay on your credit reports for 10 years after it is closed. If its payment history adversely affects your credit scores (due to late or missed payments) and you didn’t bring the account into good standing before you closed it, it will stay on your credit reports for seven years.

Accounts in Good Standing

If your account is closed in good standing, meaning you’ve never been late or missed a payment, your account will stay on your credit report for 10 years and can have a positive effect on your credit scores the entire time.

If you had late or missed payments but brought the account current before closing it, the late payments will fall off your report after seven years—but your account may remain on your report for up to 10 years depending on when it becomes “positive,” meaning all negative information has been removed.

Collection Accounts

Collection accounts may be related to unpaid loan or credit card accounts or a variety of other unpaid bills. They stay on your credit report for seven years from the date of the first missed payment that led to the account or bill being turned over to collections. If a collections entry on your credit report is associated with a loan or credit card account listed in default, the collection entry and the original account will both come off your credit reports at the same time.

Bankruptcy and Debt Settlement

Accounts closed in connection with bankruptcy or debt settlement will typically remain on your credit reports for seven years. If you file Chapter 13 bankruptcy, those negative events will fall off your credit reports around the same time as your bankruptcy, which also stays on your credit reports for seven years. A Chapter 7 bankruptcy will stay on your credit report for 10 years, outlasting any accounts closed in the process.

How to Improve Your Credit History

The following actions can help you build a strong credit history and promote credit score improvement.

Keep accounts open: When working to build your credit history, especially if you’re new to personal credit or you’re rebuilding after prior missteps that damaged your credit, it’s probably wise to avoid closing accounts voluntarily. Using your credit card accounts wisely—avoiding high balances and making all payments on time—extends your payment history and promotes credit score improvement.

Avoid closures for inactivity: It’s also wise to avoid letting your credit cards go inactive for extended periods of time, which could prompt the issuers to cancel them for inactivity. A good strategy for keeping a card active without running up a balance is to use it for a recurring fixed expense, such as a streaming-service subscription or a gym membership. You can even set up an auto-payment through your checking account to pay the card bill each month to keep the card active with minimal hassle.

Pay all your bills on time: Do this every month, without fail. Use any method that assures you don’t make a late payment, including calendar reminders, auto-payments, smartphone alarms or a string around your finger. Establish a routine and stick to it. This is the single most important thing you can do to build up your credit history and scores.

Make sure your credit reports are accurate: Check your credit reports regularly and remember that you have the right to dispute any entries that are inaccurate, to be sure your reports are true reflections of your payment history.

The Bottom Line

The closure of a credit card or loan account brings neither its instant removal from your credit reports nor the end of its influence on your credit scores. Before you choose to close an account, make sure you understand all the implications of doing so and take steps to shore up your credit history as needed. By checking your Experian credit report and monitoring your FICO® Score from Experian for free, you can track the consequences of any closed accounts and mark progress as you build your credit history.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. Our team is ready to assist you with confidence and expertise.

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