How a Closed Account Can Affect Your Credit Score

Closing a credit account might seem like a simple financial cleanup, but it can trigger a chain reaction that lowers your credit score. Here’s how the impact typically unfolds.

1. Immediate Hit to Credit Utilization: Your total available credit drops instantly. If you carry balances on other cards, this pushes your credit utilization ratio higher, which can be a red flag for lenders.
2. Potential Shift in Credit Mix: If the closed account was your only installment loan or one of few credit types, its removal narrows your credit diversity, a factor that scoring models consider.
3. Long-Term Effect on Credit History Length: The account remains on your report for up to 10 years, but once it drops off, the average age of your accounts can decrease, potentially lowering your score.
4. Loss of Positive Payment Data: Eventually, the consistent, on-time payment history associated with the closed account will disappear from your report, removing evidence of your long-term creditworthiness.

How Much Will a Closed Account Affect Your Credit Score?

The exact impact of a closed account on your credit score depends on several factors. Here are the key things to consider:

• Reason for Closure: The impact can differ if you closed the account versus the lender closing it. A lender-initiated closure, especially for delinquency, often has a more significant negative effect on your credit score.
• Account Age: Closing a long-standing account can shorten your credit history's average age. This can negatively impact your score, as lenders prefer a long, stable history of managing credit responsibly.
• Credit Utilization: Closing an account reduces your total available credit, which can increase your credit utilization ratio. A higher ratio can signal risk to lenders and may lower your score, even with the same balance.

How You Can Avoid a Closed Account Affecting Your Credit Score

Keep Other Accounts Open

To soften the impact, maintain your other credit accounts, especially older ones. This helps preserve the average age of your credit history and keeps your overall credit utilization ratio from spiking, both of which are key factors in your credit score calculation.

Pay Down Other Balances

When an account closes, you lose its credit limit, which can increase your credit utilization ratio. To counteract this, focus on paying down the balances on your remaining credit cards. This will help keep your overall debt-to-credit ratio in a healthy range.

Choose the Right Card to A Closed Account

Your credit score is dynamic, not set in stone, which means it's always possible to improve it with consistent, positive financial habits. While significant changes can take time, there are several proven methods you can use to boost your score.

• Monitor your credit reports. Obtain free reports from the three major bureaus and dispute any inaccuracies you find, as errors can negatively impact your score.
• Set up automatic bill payments. Your payment history is the most important factor in your score, so ensuring every bill is paid on time is a critical first step.
• Reduce your credit utilization ratio. Aim to use less than 30% of your available credit by paying down balances or requesting a credit limit increase.
• Become an authorized user. Being added to the credit card of someone with a strong credit history can help you benefit from their positive payment activity.
• Limit hard inquiries. Avoid applying for too much new credit at once, as each application can temporarily lower your score.
• Diversify your credit mix. Lenders like to see that you can responsibly manage different types of credit, such as a mix of credit cards and installment loans.

The Bottom Line

Closing an account can impact your credit score by affecting key factors like your credit utilization ratio and length of credit history. The account itself will remain on your credit report.

Frequently Asked Questions

Can I reopen a closed account?

It depends on the creditor and why it was closed. Some may allow you to reopen an account if it was closed recently and in good standing.

Does closing a credit card with a zero balance hurt my credit?

Yes, it can. Closing a card reduces your total available credit, which can increase your credit utilization ratio and potentially lower your score.

How long does a closed account with negative history stay on my report?

A closed account with negative information, such as late payments, will typically remain on your credit report for up to seven years.