Do Closed Accounts Affect Your Credit Score?

If you are thinking about closing an account, or you have already closed an account, you might be left wondering how this might affect your credit score.

There are so many things to be aware of when it comes to having credit, but it is important to be aware of the facts, so you don’t risk decreasing your credit score.

Unfortunately, closed credit accounts can still have an impact on your credit score, and this is true for a number of reasons. We are going to explain how closed accounts can affect your credit score in this article to help you understand more about your credit and how closing accounts can impact it.

Do Closed Accounts Affect Your Credit Score?
Do Closed Accounts Affect Your Credit Score?

Yes, closed accounts can impact your credit score. Your credit utilization ratio is one of the most important factors that is considered when it comes to your credit score.

This measures how much of your revolving credit that you are using at any point in time. The lower your utilization rate, the better your score will be.

If you were to close a credit card account and still have balances on other cards, then those balances would make up a bigger percentage of your total available limit.

In order to calculate your utilization ratio, you will need to divide the total of all of your credit card balances by the total of all of your credit card limits. To get a percentage, you will then need to times this number by 100.

It is recommended that you keep your utilization ratio under 30%, but people with the best scores will tend to have utilization of less than 10%.

Certain closed accounts can increase your credit utilization rate, as when you close a credit account, you are reducing the amount of open credit that is available to you.

This can then cause your credit utilization rate to increase, which can negatively impact your credit score.

However, it is important to note that things like installment and personal loans will not affect your credit utilization. So, a closed personal loan account would not affect your credit utilization rate.

As well as this, closing an account can also decrease the average length of your credit history.

The length of your credit history is partially determined by the average age of all your credit accounts combined. This means that closing an account, especially if it is an older account, can reduce the average length of your credit history and negatively impact your credit score.

Should You Close Accounts After Paying Off the Debt?

If you are trying to improve your credit score, it is usually a good idea to keep your credit cards open once you have managed to pay them off.

It is ideal to keep the card active by making small purchases and paying off the balance in full at the end of every month.

When Should You Close a Credit Card?

It makes sense to close a credit card in certain circumstances, even if it may affect your credit score in a negative way.

If you have more than one credit card and one of them has an annual fee, then it might not make sense for you to continue paying the fee for a card that you don’t use.

As well as this, if you are someone that has struggled with credit card debt in the past, and you may be tempted to use your credit card again if you leave the account open, then it might be a good idea to close the account.

This will remove the temptation to get into debt that you cannot afford to repay. In this circumstance, closing the account may be the best cause of action. 

Even though your scores may take a slight hit when you initially close the account, this should resolve itself within a few months if you continue to keep your credit in good health.

If you do decide that closing the account is the best option for you, then you should contact your lender to notify them that you want to close the account. You will then need to shred the card before you get rid of it.

Will Closing a Bank Account Affect My Credit?

Bank account information is not part of your credit report, which means that closing a checking or savings account will not impact your credit history.

However, if your bank account was overdrawn at the time that it was closed, and you did not pay the remaining balance, then the bank could sell your debt to a collection agency. 

The company that buys the debt can then report the collection account to credit reporting companies, which could severely negatively impact your score.

If you are closing a bank account, you should contact the bank to ensure that any withdrawals have cleared and that you don’t owe any money.. You will also need to cancel any automatic payments that you have set up before you close the account.

The Impact of Closing Credit Card Accounts Isn’t Permanent

Even though closing an account can lead to a decrease in your credit score, this usually won’t be forever.

If you think that you might apply for credit in the next 6 months, then it is probably not a good idea to close or open any new accounts right now.

Such changes to your credit could cause your score to lower until your credit history stabilizes again.

However, if you have more than one credit card account and you know you won’t be applying for credit anytime soon, the temporary decrease in scores that occurs after account closure usually isn’t a cause for concern.

How to Improve Your Credit Score for the Future

As you are now aware, if you are trying to improve your credit score, you will need to ensure that you are paying off any debt that you have. It is also important to keep a low utilization rate and make any payments on time.

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