By Derek Moran | American Express Credit Intel Freelance Contributor
5 Min Read | November 30, 2020 in Credit
Closed accounts can appear on your credit report for a number of reasons and aren’t always a bad sign.
Depending on the specifics of the account, credit score shifts can be positive or negative.
Information about closed accounts on your credit report isn’t there forever and can even be removed – under certain circumstances.
No matter how closely you pay attention to your financial history, closed accounts can appear on anyone’s credit report. It may be a credit card you haven’t used in many years, a loan you paid off, or even a mistake by a creditor or the credit bureau. Whatever the reason, a closed account can affect your credit score positively or negatively depending on the specifics of the account.
But there are often ways to manage closed accounts – or even remove them from your credit report.
Simply put, a closed account is one that has been shut off from future credits or debits. Many different types of accounts can be closed, like credit cards and auto loans. Checking, savings, and brokerage accounts can also be closed. There are several reasons why an account might be closed:
It’s easy to forget about an account after it’s closed but that doesn’t remove it from your credit report.
Generally, how long a closed account stays on your credit report depends on the standing of the account when closed. Accounts closed in good standing can remain for 10 years and are often beneficial to have on your credit score. This is because reliable payment history is the most influential factor in the FICO credit scoring model.1 There’s usually no reason to remove accounts like these.
Information about negative closed accounts – ones with defaults or late payment histories – lingers for less time: seven years, by law. The only negative information that can stay for longer is a Chapter 7 bankruptcy, which stays on credit reports for 10 years.2
Understanding how closed accounts affect your credit score can seem a bit contradictory, at times, to what you might think. For instance, paying off an auto or home loan is considered a good thing, financially. But it can result in a temporary dip in your score because it reduces the variety of credit types in your mix. Lenders usually prefer borrowers who have learned to handle a good mix of loans and credit lines.
If you don’t use a credit card, it may seem logical to close the account. But closing a credit card would lower your overall credit limit, which can raise your credit utilization and that, in turn, would negatively affect your credit score. Experts recommend keeping credit utilization under 30% but people with the very highest credit scores generally keep it under 10%.
Closed accounts with remaining balances – like a canceled credit card account with an outstanding balance – can also affect your score negatively. If the account defaulted, it could be transferred to a collection agency. Paying off closed accounts like these should improve your credit score, but you might not see an increase right away.
There are a few ways to go about getting a closed account off your credit report. If the closed account is an error – or fraudulent – the Fair Credit Reporting Act requires that the credit bureaus and information providers correct the information in your credit report. This is a pretty straightforward process you can learn more about by reading “How do I Get Something Off My Credit Report?” and “How to Dispute Your Credit Report at All 3 Bureaus.”
If the closed account is verifiable and legitimate – and has negative information like an outstanding balance or a history of late or missed payments – you still have a few options to remove it:
Closed accounts can help or hurt your credit score. It’s important to take the time to review your credit report regularly and verify your account information. If closed accounts are hurting your score, you may have options to remove the information from your credit report. Taking a proactive approach to your credit history and using the tools available to update or correct your credit report can help you in the long run.