Key Takeaways
- A closed account on your report means that account is inactive. Whether or not this will affect your credit score will depend on that account payment history, and how it relates as a part of your credit utilization.
- Leaving credit accounts open after you pay them off can be beneficial to your credit utilization ratio, give you some access to emergency funds, and can help you develop a positive payment history.
- Credit reports are a reflection of more than just your account status, a credit report shows your payment history, your credit utilization, account age and account types you use. These aspects, along with account status can affect your score.
- Closed accounts in good standing can remain on the credit report for a period up to 10 years and may assist your score! Closed accounts with negative marks may remain on the report for up to 7 years, and may hurt you in terms of your score.
A closed account on a credit report means that the account is no longer active and that you have successfully paid off the balance. The average American has 4 credit cards.1 If you are thinking about closing an account, you may wonder what it does to your credit history.
However, a closed account can hurt or benefit your credit rating. It’s essential to understand the impact of a closed account and how to read a credit report before making any changes to your finances.
What Is a Closed Credit Card Account?
When it comes to a non-revolving credit account, such as a cosigner loan or personal loan, closing it means you have paid off the account. Once this happens, the standard protocol is for your lender to close it and notify the credit reporting agencies.
With a revolving credit account, once you pay back the borrowed amount and there is a zero balance, it is up to you to decide whether you want to close your credit card account or keep it open. An inactive account will close on its own after a certain period of time.
Why Is It Helpful To Leave a Credit Account Open After Paying It Off?
Unlike bad credit loans and other loans, you do get to decide whether the credit card account remains open and as part of your credit history. Below are 3 reasons why keeping accounts open is helpful.
Credit Utilization
You can increase your available credit, which will help your credit utilization. Your credit utilization is measured as a ratio that compares your credit usage with the amount of existing credit you may have. In 2022, the average utilization rate in the U.S. was 28%.2 Leaving an account open can help boost your credit score.
Emergency Cash
With readily available credit, you don’t have to look for funding options or go through the tedious application process that can come with some loans. Instead, you’ll have credit you can use right away.
Improve Negative Payment History
If a credit card issuer notices that you manage your finances well, they may raise your credit limit. And because you can decide how often you want to make payments (based on usage), it can be an affordable way to build a payment history.
How To Avoid Closing an Account
Here are a few strategies to avoid closing accounts on your credit report:
- Keep credit cards active by making small purchases occasionally.
- Monitor your credit reports regularly to ensure accounts aren’t closed due to inactivity.
- Maintain communication with lenders, especially if facing financial hardships, to explore alternatives to account closure.
Some Drawbacks of Keeping a Revolving Account Open After Paying it Off
Although open credit accounts have credit score advantages over closed credit accounts, there can definitely be some drawbacks. Having revolving credit, such as credit card accounts open can make it easy to overspend without really thinking about your wants vs. necessities. And if you already struggle with poor spending habits, having available credit can be harmful.
With closed credit accounts, you won’t have to worry about making late payments because you won’t be able to use the account. And if you frequently end up with late payments, a closed account will mean less debt to worry about every month.
What Other Actions Will Show Up on Your Credit Reports
The state of your credit cards and loans are just some of the things that will appear on your credit report. But in addition, pay attention to these actions:
- The borrowed amount and paid back amount on each credit or loan
- Whether a loan has defaulted
- Your payment history
- Age of your accounts
- Any filed bankruptcies will appear on your credit reports
- The lender’s basic information
Correcting Credit Reporting Errors and Inconsistencies
Checking your credit reports is important in fixing errors or inconsistencies. If you see something incorrect on your credit reports, you can contact the primary lender.
If everything looks good on their end, they may contact the credit bureau for you, and things should be fixed quickly. On the other hand, if the mistake is with a credit bureau which will likely be with inconsistency, you can contact the respective credit bureau and file a dispute—here is a detailed guide on how to correct errors on your credit report.
How Your Credit Reports Impact Your Credit Scores
Here are some factors that make up your credit scores (many of which will show up on your credit reports):
| Factor | Percentage Impact | Explanation |
| Payment History | 35% | Reflects whether you’ve paid your credit accounts on time. Late payments can stay on your credit history for up to 7 years. |
| Credit Utilization | 30% | The credit utilization ratio of your current credit card balances to your credit limits. Lower utilization rates are better. |
| Length of Credit History | 15% | Includes the age of your oldest account, the age of your newest account, and the average age of all accounts. Older credit histories are preferable. |
| Credit Mix | 10% | Credit mix is the type of accounts (credit cards, retail accounts, installment loans, mortgage loans, etc.) you have. Keep in mind that closed financial accounts will stay on your credit report for 10 years. |
| New Credit/Inquiries | 10% | Reflects the number of recent inquiries and new accounts. Multiple inquiries will stay on your credit report and can be seen as risky behavior. |
FAQs About Accounts on a Credit Report
To close an account on your credit report, you’ll need to contact the respective financial institution directly. Once closed, the status will be updated with the credit bureaus. It’s essential to keep an eye on your credit reports to ensure the changes reflect accurately.
Closed credit accounts, whether in good standing or not, can remain on your credit report for several years. Positive information typically stays for up to 10 years, while negative information, like late payments, can stay for up to 7 years. Always review your credit history periodically to be informed and keep an eye on your credit scores.
Yes, closed accounts can affect your credit score. While an account in good standing can have a positive impact, any negative history, like missed payments, can lower your score. It’s crucial to understand how closed accounts impact your overall FICO score and financial health.
Reopening a closed account depends on the financial institution’s policies. While some may allow it, others might not. If you’re considering reopening an account, reach out to the respective lender for guidance.
If you spot an error regarding closed accounts on your credit report, you should file a dispute with the credit bureaus. They are obligated to investigate and correct any inaccuracies. Regularly reviewing your credit reports can help you catch and address such errors promptly.
Monitoring closed accounts on your credit reports regularly ensures that all information is accurate and up-to-date. It helps in identifying any discrepancies or potential identity theft early on, safeguarding your credit history.
If you’re uncertain about any closed accounts listed on your credit report, it’s best to contact the credit bureaus for clarification. They can provide details and guide you on any necessary steps to ensure your credit history remains accurate.
Multiple closed accounts on your credit report can have varied effects. If these accounts were in good standing, they might not harm but could even benefit your credit history. However, if they have negative records, they could lower your credit score. It’s essential to understand each account’s history and its impact on your overall credit score.
Financial institutions or lenders typically report the status of your accounts to the credit bureaus. If you see an account marked as closed and you didn’t initiate it, contact the respective lender and the credit bureau for clarification.
The origin of a closed account refers to the financial institution or lender that provided the credit. You can find this information listed alongside the account details on your credit report.
Takeaway From CreditNinja About a Closed Account on Credit Report
Closed accounts can affect credit scores, but there are steps you can take to minimize the effects. If you want further information on how to boost credit scores or how to fix a declined debit card, check out the CreditNinja financial blog online!
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