Reading through your credit report and seeing a closed account, and trying to understand what it means? A closed account will signify a few different actions on your credit accounts but will mean the same thing. Continue reading to learn more about what a closed account will tell you, along with reading and understanding more about your credit report and the different actions that will show up there.
The Two Ways To Get to a Closed Account and What It Means
A closed account will mean that a credit account is no longer active. When it comes to a non-revolving credit account, such as a loan with monthly installments, it will mean that 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—hence the listing on your credit reports.
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 (Is Possible)
If the credit account you borrow from is something like an installment or personal loan, you won’t get a say in whether it stays open. With revolving accounts like a credit card account, you do get to decide whether that account remains open and as a part of your credit history.
There are a few reasons why having your credit account open is helpful. The first reason is that it will help 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. And so, leaving an account open by either using it from time to time or not taking the step of closing it can definitely help boost your credit score.
Another thing to consider is that having available credit can be a massive help in case of an emergency, especially if your financial situation changes. 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.
And finally, leaving your revolving credit account open may help you access additional credit without even having to apply for it, and it is an easy way to build a payment history. For example, if a credit card issuer notices that you make your payments on time or an increase in income, they may raise your credit limit—which will be positive in many ways! 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. For example, if you only use $100 a month on a credit card, chances are your monthly payment will be less than $30.
Some Drawbacks of Keeping a Revolving Account Open After Paying it Off
Although open credit accounts have credit score advantages over closed 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 accounts, you won’t have to worry about making 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.
The good news is that both of these drawbacks have solutions. You can do all kinds of research on your own to help improve your spending habits. And for monthly bills, something as simple as setting up automatic payments from your checking account.
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. There are a few other things and actions that will be there and are important to pay attention to:
The Borrowed Amount and Paid Back Amount on Each Credit or Loan
With every loan or credit card you borrow from, that amount will be listed on your reports. You’ll see the balance due and the balance you have paid back reflected in the total amount. Every time you chip away at your loan’s balance or borrow more funds from that account, that amount will be updated.
Whether a Loan Has Defaulted
Loan default occurs when you break the loan contract. Most of the time, this happens after several missed payments. Loan default will definitely show up on your credit reports and can be a red flag for potential lenders. It will remain there for about seven years.
All Your Payment History
All payments you make, late or on time, will be reported to each credit bureau and will appear on your reports. Making on-time payments will look good, while late payments will be a red flag to whoever views your credit.
Age of Your Accounts
Your loan or credit card age will also appear on your credit report. Having a good mix of new and old credit accounts will be helpful. Another reason why closed accounts aren’t the best idea if you can keep them open.
The Type of Borrower You Are on the Account
In most cases, you will likely be the primary and only borrower for your loan or credit card. However, if you sign up for the role of a cosigner, co-borrower, or authorized user, that correct account role should be listed there.
Any Filed Bankruptcies Will Appear on Your Credit Reports
You can file for Chapter 7 and Chapter 13, depending on your needs for debt relief. If you do decide to pursue either of these, one will show up on your credit reports. Bankruptcy will remain on your credit reports for between 7 and 10 years, depending on the type of bankruptcy you file. Both bankruptcies will significantly harm your credit scores and reflect negatively on you, as a borrower, to any potential lenders.
The Lender’s Basic Information
Your lender’s name and some information about them will be listed on your credit reports. If you see a creditor you don’t recognize, inquire more about it. It could be as simple as a debt transfer (for example, mortgages can change from one lender to another) or as severe as the first sign of identity theft.
Correcting Credit Reporting Errors and Inconsistencies
Reporting errors on credit reports with the credit bureaus can happen all the time! And so, it is extremely important to check your credit reports often for incorrect information. You can get a free credit report from each credit bureau annually. And for a small fee, you can access them more often. Checking your credit reports is important in fixing errors or inconsistencies—as errors will skew your credit scores and can help increase financial protection. Often, things like a new credit account reported, new loan amounts, and lenders you know you haven’t applied with are the first signs of identity theft.
If you see something incorrect on your credit reports, you can start with the primary lender, call them or email them asking about the account information. 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 correcting credit reporting errors.
How Your Credit Reports Impact Your Credit Scores
Your credit reports have all your credit history, which makes up your credit scores. And so, all your actions on your credit accounts will be reflected in your reports and scores. If you aren’t familiar with the variables that make up your scores, it can be hard to picture precisely why that happens. But once you get an understanding of that, you’ll find it easier to make that connection. Here are some factors that make up your credit scores (many of which will show up on your credit reports):
Your Payment History
Your payment history is exactly what it sounds like —a history of payments on your debts. Every time you make an on-time payment, it will help your score, while a late payment will hurt it. Your payment history is the most significant factor impacting your scores, so making your payments on time is extremely important.
Credit Utilization/Amount Owed
The amount of money you owe in contrast to available credit will also be factored in to determine your credit score. Those with fair to good credit will have this ratio (credit utilization ratio) below 30%.
Age of Your Accounts
Older accounts can definitely be helpful to your credit score, as it shows sustained responsibility for several years. It can also help a lender get a closer look at a long history of your credit usage patterns.
Having a diverse credit mix can also significantly help improve a credit score! It shows a lender that you have experience with several different account types and are thoughtful with the loan options you decide to borrow from.
Hard Credit Inquiries
When you inquire about new credit, a lender will conduct a hard credit check to pull your credit reports. Each credit inquiry will lower your score by a few points, so spacing these out is essential. If you want to compare loan options, pre-approval should help!