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How closed accounts affect credit history, scores

By

Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I have been using my credit cards for a long time and have never missed a payment. But I currently hold six cards. I'm not sure whether that is good or bad. I want to close some accounts. Will doing so affect my credit history? Also, one of my cards gave me a balance transfer option with a 0 percent APR until January 2017, so I took it and am paying the monthly payments. How does that affect my credit score? -- Krish

Answer

Dear Krish,
Just about everything you do with credit cards and bank loans impacts your credit history, as long as the issuers subscribe to the credit reporting agencies -- TransUnion, Equifax, and Experian. Nearly all card issuers do. It's a constantly updating record of how you've been borrowing and repaying money. Regarding credit cards, that activity would include each card and its credit line, the amount you charge and whether your payments were posted by the due date. Closing active accounts will also, naturally, be a part of your record.

So does your credit history appear good or bad? Based on what you've described, I'd say that your credit reports are probably showing the type of actions that are perceived as highly attractive to most lenders. You've had and used a variety of credit cards for a multitude of years and have always paid on time. That indicates financial responsibility. 

The amount of debt you're carrying as opposed to the amount you can borrow with your credit lines is a major scoring factor. If your overall balances are zero or very low, that's great. Owe a lot compared to the total of your credit limits, though, and you appear overextended, which is bad.

For an objective, numerical assessment on how you're doing, you need to check your credit score. The most widely used is the FICO score, available for about $20 per credit bureau at myfico.com. The competing VantageScore is available free at my.creditcards.com. With either score, the higher the number, the lower your lending risk.

Closing credit card accounts will negatively impact your credit scores, especially if you have any debt, which you say you do. You've transferred balances from one account that charged interest to one that suspends it for a specified period. That's often a smart move because you can save a lot of money in interest. Pay off the balance during the promotional period and you will escape interest charges and get out of debt more quickly. Large and consistent payments are positive, so your scores will soar.

The most important credit scoring factor you have to watch out for in your situation is the credit utilization ratio. That's the ratio of credit you're using versus the amount you have available. The lower your ratio, the better.

Do not close any accounts until you've finished paying off all your card balances. Cancel any now and your ratio will rise, causing your credit score to fall. The credit scoring formula tracks both the ratio of each card, and your overall ratio. That means if you shifted your balance from a card with a high credit limit to one with a low limit, you have also caused your score to drop.

After you are free of card balances, assess your credit cards for desirability. For scoring purposes, maintaining well-managed, long-standing accounts with the highest credit limits is a plus, but the choice should also be based on personal needs. Maybe you want to streamline your personal finances, and trimming back to just a couple pieces of plastic will make your life easier. That's OK! Just use the remaining cards the right way by charging small amounts regularly and paying the bills in full and before the due date. Any scoring points you might initially lose by shutting down extraneous accounts should soon be regained with a positive activity on your remaining accounts. 

And just because you close a card doesn't mean it disappears from your credit report. Closed accounts and positive payment activity associated with them will remain on your credit history for up to 10 years. Closed accounts with negative payment activity, such as late payments, are removed sooner. They disappear seven years from the date when the account became delinquent.

See related: How many credit cards is too many?

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Published: January 6, 2016


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Updated: 12-11-2016


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