How a closed account affects your credit score

The path to a great credit score can be a long one, and it can have some bumps along the way. But if you keep your credit utilization ratio low and avoiding anything negative (like missing payments, etc.) those bumps should be minor.

Keep in mind that the credit game requires a fair amount of patience and that if your score is good enough to get you what you want, that’s all that really matters. Chasing perfection in scoring can become a fool’s errand.

There are, however, certain things that can ding your score, so it’s best to be aware of them and try your best to avoid them. Learn now how a closed account can affect your score and decide if you really want to close it.

How does a closed account affect your length of credit history?

A credit score uses an algorithm that has been proven to be able to predict future delinquencies. As a backward-looking model that predicts the future, it relies heavily on past performance as well as other current factors such as credit utilization and credit mix.

Let’s talk about how closing a card account affects your length of credit history, which makes up 15% of your FICO credit score.

While your score will continue to include account history from all closed, as well as open, cards for as long as they remain on your credit report, the credit bureaus remove closed accounts in good standing after about 10 years and closed accounts with a history of late payments after seven years from the date of the delinquency.

Why seven and 10? Because that’s what the customers of the credit bureaus want to see when underwriting consumers. If lenders suddenly wanted to see 20 years of history, the bureaus would do their best to provide it (and thereby increase sales of credit reports and other products).

The VantageScore model does not count closed accounts; only open ones are used to calculate credit age. So, the answer to your question is yes, closed accounts still count at least when it comes to your FICO score. The thing about credit history is that it is, well, historical.

It takes time to happen and there is no way to speed it up – there are no quick fixes for this piece of the credit score pie. However, below are some things you can do – and not do – to raise your score while you are waiting for your credit report to age.

Closing a credit card can raise your credit utilization ratio

When an installment loan, for say a car or furniture, gets paid off that account is closed. However, I want you to think twice before closing a revolving account (like a credit card) just because you haven’t used it in a while.

Don’t get me wrong – there are good reasons to close revolving accounts, like a high annual fee or poor customer service – but generally speaking, I recommend not closing accounts especially for someone with a limited credit history.

While the closed account will still count toward your credit age in that part of the equation, if you close a credit card you may lose points in the credit utilization scoring factor, which counts for 30% of your FICO score.

Closing an account reduces your overall available credit, which is used in the utilization calculation. Utilization is figured two ways. First, the ratio of balance to credit unit is used, and second, the ratio of all your credit limits on all your cards to all your balances is factored in. Closing an account reduces the value of the second ratio.

Other ways to improve your credit score

Add positive data to your credit report

There are a couple of fairly new options that may be attractive to help raise your score, like Experian Boost and UltraFICO. These are programs that allow the consumer to supply positive data in their credit report that can be used to increase scores. This is especially effective for people with limited credit histories. Both are simple to use and results are seen instantly.

To use Experian Boost you must allow the credit bureau to access to your banking information in order to pull things like utility and phone bill payments. Positive payment histories are incorporated in your report and can add points to your score.
UltraFICO looks at your checking and savings account information for positive data such as how much you have in savings, how active your accounts are and how long they have been open.

Both use only positive data and you can enroll or drop out at any time. Also, both only impact your Experian report, so keep that in mind. If you pay rent to a landlord that does not report to the bureaus, consider using a rent payment service that acts as a middleman when you pay your rent, enabling them to report positive rent payment history on your credit reports.

Mix up your credit card use

A word of caution – don’t fall in love with one credit card! Instead, spread your purchases over several cards to keep your individual card utilization factor low. And try to not charge above 25% of your credit line – super scorers keep utilization in the single digits.

Consider a passbook loan

You could also take out a passbook savings loan, especially if you are light in the credit mix department. While this only accounts for 10% of your overall score, it helps creditors to see that you can handle both fixed and variable payments. People with thinner files can certainly benefit from this practice.

Passbook savings loans enable you to use your own money so you don’t have to worry about accumulating debt. Just be sure that the loan will be reported to the credit bureaus. If so, it’s a win-win proposition.

Bottom line

Anyone looking to secure funding for a major purchase should give themselves three to six months to clean up their credit reports first. And during that time just keep doing what you’ve been doing as far as keeping your utilization low and paying your bills on time, as agreed, every single time.

Also, remember to keep track of your score and don’t be discouraged if it takes longer than you’d like to climb. You will get there.