Home > Credit Score > A Bad Union—Closed Accounts and Your Credit Report

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Credit’s a tricky thing. Some things obviously hurt your credit, like a late payment or no payment or maxing out your credit cards. But the effect of some things on your credit isn’t obvious at all and are almost counterintuitive. Those things seem like they should help your credit but can actually hurt. One of those things is closing accounts. But are closed account on your credit report bad? Well, yes. But why?

Closed Account Are Bad for Your Credit

Yes Virginia, closing an account, such as a credit card account, can hurt your credit. But why?

There are five key areas that are tracked on your credit file by the major credit bureaus:

  • Payment history
  • Debt usage or credit utilization ratio
  • Credit age
  • Account mix
  • Credit inquiries

The credit bureaus run credit scoring models against those five factors to calculate your credit score. Payment history makes up roughly 35% of your score, debt usage 30%, credit age 15% and account mix and credit inquiries 10% each.

And while it may seem like closing credit cards is a good idea. It’s actually as hurtful to your credit as missing payments. Closing an account is a triple threat to your credit score as it impacts your:

That potentially 55% of your score that’s impacted by closing an account—20% more than missing a payment that affects your payment history. Ouch!

How Closed Accounts Hurt Your Credit

Just how does closing an account affect so many areas used to calculate your credit scores? Here’s how.

Closing an Account Hurts Your Credit Utilization Ratio

“Revolving utilization” is the amount of your revolving credit card limits you’re currently using. So your available credit limits compared to your actual credit card balances. For example, if you have an open credit card with a $2,000 credit limit and a $1,000 balance then you are 50% “utilized” on that account because you’re using half of your credit limit.

The same applies if you had one credit card with a $1,500 limit and one with a $500 limit and balance of $1,000 across both cards. In other words, your total credit limit and your total balance(s) are what matters.

Credit card issuers, lenders and the credit scoring models like to see your credit utilization ratio at no more than 30% and ideally no more than 10%. Having a ratio of 30% or less is almost as important to your credit scores as making your payments on time. As the ratio increases, your credit score decreases.

The assumption is that the more you charge, the less responsible and therefore riskier you are.

But where does a closed account come in? Well, an open account adds to your credit limit. A closed account subtracts from it. And when you close an account, that account’s credit limit no longer applies toward your credit utilization ratio.

So, in the example above where you have one card with a $1,500 limit and one with a $500 limit, if you close the one with the $500 limit, but still have a $1,000 balance, your credit utilization ratio jumps from 50% to 67%! That’s 17% farther away from the 30% max that lenders and creditors want to see.

Bottom line, it’s better to keep the account open and not use it or only use it sparingly.

Closing an Account Hurts Your Credit Age or History

You’d think credit age was a simple measure of how long you’ve been using credit in general. Not so. It’s actually a measure of how long you’ve had any given account or loan. And while closed accounts don’t immediately fall off your credit report, they do fall off sooner than open accounts.

In most cases, negative credit information stays on your credit files for seven years from the date the debt first becomes delinquent. Positive credit information can stay indefinitely. Closed accounts in good standing are usually removed from the credit report within 10 years after closing. And while credit scores continue to benefit from the positive history associated with an account for as long as it remains on the credit report—open or closed—once the account is removed from your credit report all of that history is gone.

And the credit scoring models favor a long credit history. Consumers with a younger credit history are seen as riskier borrowers than consumers who’ve had credit for a longer time.

Bottom line, hang on to those old accounts by leaving them open. Keeping them open doesn’t mean you have to use them—although you want to make sure the issuer won’t close the account if you don’t use it. If they will, simply use that account one year or so for a small purchase.

Closing an Account Hurts Your Account Mix

Lenders and creditors like to see well-rounded consumers. They don’t want consumers with only credit cards and no loans. And they don’t want consumers with only loans and no credit cards. That mix of different types of accounts—revolving credit and installment loans—is your account mix.

While you can’t realistically extend the term of an installment loan. For example, extending a 30-year mortgage to a 45-year mortgage. You can keep credit card accounts open so you have a beefier account mix. And if you don’t have any installment loans, consider taking out a small personal loan just to add to your account mix now and again if needed and assuming it won’t cause you financial issues. Even an auto loan is an installment loan. If you can swing a 0% loan for your next car, that can be a beautiful boost to your credit score.

Note too that open accounts are included in your account mix. Open accounts are those that are paid off monthly, such as utilities, your cell phone, and charge cards.

When to Consider Closing an Account

Sometimes closed accounts on your credit report aren’t as bad as the consequences of keeping the account open. Cases, when it may be best to close the account, include:

  • The account is a joint card with a former spouse, business partner or another person that you need to sever ties with and/or who creates a financial liability for you.
  • You tend to overspend and the temptation of the account is too great.
  • The account has high recurring fees, such as a credit card with a high annual fee.

Can You Reopen a Closed Account on a Credit Report?

You don’t have a lot of options to re-open accounts closed due to delinquency. You can though ask that an issuer re-open an account that was in good standing but that you chose to close. The credit card company may update the status of the original account to open or make create a new account. You can ask which approach it uses. Reopening an old account can build on your established credit history.

Where Is Your Credit?

To find out where your credit currently stands, you can check all three of your credit reports free once a year at AnnualCreditReport.com. If you’d like to know your score and keep an eye on your credit more regularly, Credit.com’s free Experian credit score and credit report card gives you an easy-to-understand breakdown of your credit report’s details using letter grades, along with free credit score updated every 14 days.

The Credit.com credit report card for someone with a good credit score. Your report card can show closed accounts and how they effect your credit.

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  • DAS

    I was checking my credit score on credit.com and notice it dropped 25 points. Never been late and have not applied for any new credit in 90 days. A couple of months ago it went up have the 60 days past of me applying for new credit over the holidays and now it’s down.

  • http://credit.com John Drillock

    I’m confused about all these credit reporting agencies as to which one is used for what purpose. Trans Union, Experian, Equifax, Advantage, FICO. Which one is most widely used but better yet, which one is m ore likely to be used by what type of financial instituion,.

  • Barry Paperno

    Hi John, First, of those companies you mentioned, only three are actually credit reporting agencies: TransUnion, Experian and Equifax. They all do the same things -collect data, provide credit reports, calculate credit scores – with Experian and Equifax being the most widely used of the three.

    All are used by all types of financial institutions, with many using all three to at least some degree. That is, lenders of all types – credit card, mortgage, auto, student, etc. – tend to use different CRAs for different products, portfolios and regions. So, for example, a lender may use Experian for their auto lending in the Western region, while using Equifax for auto lending in the East, and mortgage lending in the Mid-West. This same lender may also use TransUnion for their credit card portfolios in the South region, Equifax in the Northeast and Experian in the Mid-West.

    VantageScore (what I think you meant by “Advantage”) and FICO are analytic companies that develop the credit scoring models the three CRAs use to calculate the credit scores they sell to lenders and consumers. VantageScore is owned by the three agencies, while FICO is an independent company.

    Hope that clarifies things a bit.

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  • Michele Brissette

    I have a credit card I just paid off early this year (have not used the card in 3 years and don’t even have the actual card any longer). I received a letter saying I would be charged a $59 annual fee next month if my card remains open. But I am being told that closing a credit account will negatively affect my credit. I am not planning on using this card and they will not waive the fee. I’m on a strict budget (taking care of my three step sons and financial obligations to my husbands ex wife) so I really don’t want to pay a fee for a card I won’t be using. is there anything I can do differently?

  • JD

    I just looked at my credit reports as I am wanting to buy a car. I got a very detailed report from Experian. Equifax was less detailed. Neither gave me an upfront ‘score’ number and Equifax wanted me to pay $8 in order to obtain this score, despite the free report. I thought the score was supposed to be free (once a year, anyway!)

    • Credit.com

      JD — The annual freebie is specific to credit reports, the credit scores are not free. There are free educational services like the Credit Report Card that will provide a free credit score. Otherwise, you’ll have to pay to get your score. It’s also important to understand the differences in scores — this article will explain why the credit score your lender pulls won’t necessarily look like the score you obtain online or purchase from the bureaus: Three Reasons Why Your Free Credit Score Looks Wrong

  • Carolyn

    Hi Michele. It’s best that you pay the fee only if your interest lie in keeping and increasing your credit score. If not, this unused card will eventually drop off, even though you never missed a payment and paid it off early. Paying the fee is an investment to you if you intend to purchase a home, refinance your existing mortgage, or obtain a line of credit. I know, you’re saying ‘why do I have to pay to have great credit?’; unfortunately, it is the name of the game.

    • Credit.com

      Excellent advice, Carolyn. So true.

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  • ivo ivan jelic

    i live in canada ? can-you-help,,,jelic

    • Credit.com

      Ivan – what’s your question?

  • Raquel

    I have disputed something on my credit report with clear evidence of the mishap but it remains on my credit report as disputed, should this not have been removed?? And it has been over a year already, any advice?

    • Credit.com

      Raquel — Disputing and correcting an error shouldn’t take a year — ever. Under Federal law, the credit reporting agencies have 30 day to investigate and resolve a dispute. Providing clear evidence is a very good way to go, and generally helps in cases where the data furnisher (or the entity reporting the item) validates that the error is actually accurate. Can you provide a little more detail on what you disputed and what the error was? We may be able to shed a little more light on why it wasn’t updated, etc.

      In the meantime, here are two resources that may help in resolving a dispute and how the dispute process works:
      A Step-By-Step Guide to Disputing Credit Report Mistakes
      Credit Report Mistakes? Here’s How to Fix Them

  • Annie W

    If I have a store credit card that I had a late payment on about 4 years ago and I haven’t used it since (I have already paid off the entire balance,) should I close the account? Would it be better for my credit score to close the account, or should I keep it open?

    Also, I heard a rumor where if you pay off your account balances before it’s due, it hurts your credit. Is this true?

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  • Zach

    I have a credit limit of 500, if I’ve spent 400 of it I know it’s a high utilization ratio but if I pay it down under the 25% ratio before its due, will it show on my credit report

    • http://www.credit.com/ Credit.com Credit Experts

      It will depend on when your credit card issuer reports their update to the credit reporting agencies. To help explain, most credit card issuers report updates to the credit reporting agencies once a month, typically around the same time your monthly statement drops. To know for sure, you may wish to call your credit card company to find out when they report their update –If you pay the balance before the next statement drops, it should show the with the next update… otherwise, it’ll probably take a good 30+ days for you to see the updated balance.

      One last comment regarding your utilization, I know it’s hard with a low credit limit but ideally, you want to try and keep that utilization to even less than 25%. The lower the utilization the better for your scores which means 20% is better than 25%, 15% is better than 20%, etc.

  • http://www.credit.com/ Credit.com Credit Experts

    Using credit and paying your bills on time is the best way to improve your credit scores. Paying a credit card off each month — which can result in a zero balance — will not hurt your credit.

    For tips on how to expedite the process of raising your credit scores, see 3 Ways to Boost Your Credit Score.

  • http://www.credit.com/ Credit.com Credit Experts

    It might, for two reasons. One is that it will raise your credit utilization rate, the percentage of available credit that you are using. (If you have a credit limit of $1,000, for example, a balance of $200 would translate into a credit utilization rate of 20%). You want to keep that number below 30%; below 10% is even better. Closing two accounts will reduce the amount of available credit. The other reason is that age of accounts also affects your scores. If these are accounts you’ve had for many years, you might want to keep them open for that reason. There resources may be useful in understanding more about factors that affect your credit scores.
    The Biggest Credit Mistake People Make
    Why the Age of Your Accounts Matters

  • bsue

    I have a card that went bad in 2004 and I have not heard anything about it until recently. It is over 9 yrs since a creditor had contacted me about this account. Am I still obligated to pay the balance and how can I verify it’s the true balance.

    • http://www.Credit.com/ Gerri Detweiler

      The statute of limitations in your state has likely expired. That means they can’t do a whole lot to collect. In addition, a debt that old should not be on your credit reports either. The exception to both would be if they have obtained a court judgment against you. (Your credit report would likely list a judgment if that were the case.) Read: Does Your Old Debt Have an Expiration Date?

  • http://www.credit.com/ Credit.com Credit Experts

    Rachel —
    Anytime you apply for new credit, your credit score takes a small, temporary hit. Do you want another credit card? Or would a small personal loan better suit your purposes? This time, you’ll want to read the fine print very carefully to see if the terms of the balance transfer are ones you can live with. Most charge at least 3% of the amount of the balance you are transferring, so that’s something to keep in mind and be alert for.
    Here are some Credit.com resources that might be useful to you:
    The First Thing to Do Before Applying for a Credit Card
    5 Tips for Consolidating Credit Card Debt

  • Katrina

    I have 11 accounts that are hospital debt ,a few verizon accounts and a $130 ppl bill that I had from about 5 years ago. I am in the process of paying it off now, Which is a total of $3,962 in debt I brought my # down to$2,463 my score is still the same F 590 but i see my payments changing. I never had any credit cards,but my question is g if I pay off all my debt will that push my credit score up?

    • http://www.Credit.com/ Gerri Detweiler

      Unfortunately paying off accounts that in collections generally doesn’t help your credit scores. They are considered negative whether they are paid or unpaid. However, it sounds like you are getting close to the time where they may come off your credit reports (7 years plus 180 days from the date you first fell behind with the original creditor).

  • http://www.credit.com/ Credit.com Credit Experts

    Jenn —
    Can you get a secured card? As its name suggests, it’s secured by a deposit you make. If you do that, pay on time, and keep the balance to less than 30% of your credit limit, you should see your score improve. You can read more here: How Secured Cards Help Build Credit

  • Delight Kilyan

    I have several checking accounts, local and as I’m planning on moving from a small town to a big city, have opened new ones I can access there. As long as there is never an overdraft on any account, does it affect my credit adversely?

    • http://www.credit.com/ Credit.com Credit Experts

      If you mean does having multiple checking accounts in two cities hurt your credit, the answer is no. As long as you are using them responsibly and there are adequate funds, you should be fine.

  • Eve

    If have good and bad accounts on my transuion account and they have none on my equifax and experian . it look like i have no credit on these companies. Should I report the good accounts to every bureau?

    • http://www.Credit.com/ Gerri Detweiler

      Credit reporting is a voluntary system. Lenders are not required to report to any credit bureau, and so unfortunately they are required to report to all three either. You may want to consider getting a secured card that is reported to all three credit reporting agencies. Here’s more information:
      How Secured Cards Help Build Credit

  • Sam

    How is it a “fair credit reporting act” if the bureaus hand is never checked? They report any and all negative credit history and ‘conveniently’ leave off some of the good history! Ever notice that? I want to start a class action law suit against the scum bag credit bureaus! It’s so obvious they get paid to keep our credit scores looking bad. Their clients can charge us higher interest rates then, which equals more money in their pockets! Another thing that burns me up. is why are ‘we’ penalized for shopping for the best interest rate by checking around? They have cleverly eliminated that from consumers so that if you do shop around (like a responsible person would do) that they can ‘lower’ your credit score because of multiple credit pulls! That is so UNFAIR! The law should allow the consumer to pull their own credit when shopping for a car or new mortgage etc.. and have it good for 30 days minimum! The fact that they can now check your credit to apply for a job is outrageous!!! Who’s with me on this injustice?

  • mary

    i have had the same credit card for 9 years but have a several missed payments it is now payed up but do to the bad history should i close it keep in mind when i say bad 6 months ago i missed 120 day late and was not the first time in the past 4 years before that and seance I’ve kept it currant and now has 0 balance

    • http://www.credit.com/ Credit.com Credit Experts

      If you are thinking that closing the account will remove the bad history, that’s wrong. Keeping the card will help in the “credit age” portion of your score. What you need now is positive information on your credit report (things like on-time payments and using just a small portion of your available credit). Here’s how to monitor your credit score for free.

  • Michael Rhodes

    This answer is based on my experience, not on anything I’ve read recently. In general, any payment you make above and beyond the minimum due each month can go directly to principal, but you need to indicate that as your wish when making that payment. For example, let’s say you have a loan with a 100.00 payment due each month. Of that 100.00, 60.00 goes to interest, 40.00 goes to principal. If you make a payment of 150.00 instead, and write on the memo line of your check something along the lines of “all monies in excess of the amount due is to be applied to the principal” then of that 150.00 payment, 60.00 will still go to interest, but then 90.00 will go to principal instead of the normal 40.00. Now, that being said, I have done this, and the person processing the check missed the statement on the memo line. A phone call fixed it, but in the future, I wrote two separate checks…one for the normal amount due, and the other I wrote “Principal only” on the memo line, circled it, and highlighted it. That worked every time in the future. Finally, I started out with “in general,” because sometimes there is fine print that puts specific limitations on making these extra “principal only” payments. For example, federal student loans (aka Federal Direct Loans) will not allow this unless the extra “principal only” payment is at least equal to your minimum monthly payment. I had such large loans my payments were over 500.00 per month. No way could I double that! Good luck!

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