Closed accounts affect your credit score, but maybe not how you think


Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Question for the expert Dear Speaking of Credit,
Several years ago, Texaco sold out its stores in our geographic area so my credit card has been unused for two years and no balance is due. I received a letter informing me that my card would be canceled for nonuse. My question is this: Since it is being canceled for nonuse and not because of a delinquency, will this still have a negative impact on my credit and, if so, what can I do about it? Apparently the old card dies sometime in December even though the expiration date is March 15.  -- Paul

Answer for the expert

Dear Paul,
Closing accounts can definitely hurt your score, yet there's nothing about the "nonuse" reason, just as there's nothing about it being closed due to delinquency, that impacts a score by any more than a card being closed at the cardholder's request. That is, a closed card is treated by the score simply as a closed card without regard to why it was closed or who -- the creditor or cardholder -- initiated the closing.

As for what you can do about it, it sounds like a done deal, especially since a card issuer can close a single account or large set of accounts anytime it wishes.

Still, yours is a good question, because it allows me to knock down some myths about credit scoring. It's one of those subjective, credit-related assumptions that fell out of favor when credit scoring began some 25 years ago, but that consumers and even some lenders continue to believe are baked into credit scores.

A few such negative assumptions include:

  • A card indicating "closed by creditor" (or in this case, "closed due to nonuse") on the credit report might be the result of some underlying negative information that the creditor closing the card has knowledge of, and that isn't reflected on the credit report.
  • An inquiry not accompanied by a new account from the same creditor on the credit report indicates the application was denied, since, had the application been approved, there would be a new account appearing on the report.
  • Even for consumers with a flawless payment history, a high amount of unused available credit points to a higher likelihood of future payment problems, should the cardholder be faced with a situation in which the temptation to charge excessively would be too great to resist.

While these kinds of credit decision-making factors may still be alive and well within a particular card issuer's policy criteria (subjective reasons, not related to credit scoring) or custom credit score developed for its own use, they are not part of any widely used credit scoring systems, such as FICO, for a simple reason: such information has not been shown to be reliable predictors of future credit risk.

Returning to your question, there are two categories within your credit score where the closing or canceling of your Texaco card could possibly have a negative impact on your score: One that could take effect immediately, the other a number of years into the future.

The first example is one that warrants your immediate attention, since it could affect the "amounts owed" portion of your score, which makes up almost 30 percent. Specifically, this is your combined credit utilization percentage (total card balances/credit limits) that, once it gets higher than 25 percent or so, could be impacted when any card is closed. At such a percentage or higher, removing the amount of available credit provided by this account, which is what will happen when the card is closed, is likely to increase the credit utilization percentage and lower your score.

If, on the other hand, your total card balances currently make up only a small percentage of your available credit, there shouldn't be much, if any, change to your overall utilization percentage when the credit line from the Texaco card is removed from the scoring equation. Hopefully, your total balances are low, in which case you have nothing to fear -- at least for now.

The second possible outcome from closing this card is one that could only occur well into the future via a set of scoring calculations, "length of credit history ," that makes up about 15 percent of your score. It is an outcome that you should be particularly aware of if this card is one of only two or three open cards you carry. It is also one you can forget about entirely if you have more than a couple of other cards -- older the better -- that you intend to keep open and active indefinitely.

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. Once an account no longer appears on your credit report, it's the end of the line for that account having any impact, good or bad, on your score. But again, as long as you retain at least a few open and active cards well into the future, any such long-term effect on your length of credit history will be zero to minimal.

Going forward, I would focus on paying down any high card balances, if you have any, to minimize the possible impact on your credit utilization percentage from the loss of the Texaco card's credit line. If you don't have any high card balances and thus low credit utilization, take this opportunity to give yourself a well-deserved pat on the back, as the closing of this or any other card should do your score no noticeable harm. Just expect to see that Texaco card on your credit report for years to come, continuing to contribute positively to your credit score. Then once it's gone in ten years or less, as long as you have a few other open and active well-established cards in good standing, your score won't even miss it.

See related: Opening 3 cards at once dings credit score, short-term, Did Macy's ruin my credit when it closed, reopened my card account?, Closing 50 cards without damaging credit score

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Published: December 25, 2014

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