Help your score rebound after card issuer closes account


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

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Question Dear Opening Credits,
I signed up for a retail jeweler's store credit card. I never used it and they recently closed the account. My credit score lost something like 50 points. How long will it take for my score to go back up to where it was and how badly will that closed account affect me? -- Sara

Answer for the expert Dear Sara,
Fear not, that defunct credit card won't tarnish your credit scores for long, and you can shorten it even further. Here's what you need to know and do.

Soon after you opened this retail account, the creditor began to send information about it to the three credit reporting agencies -- Equifax, TransUnion and Experian. Although you didn't buy a single bauble with the account, the fact that you were granted a specific credit line did appear on your credit reports. That amount, with the credit limit, was then factored into your credit scores.

FICO is the most commonly used score, and it ranges from 300 to 850. The retail account you had would have helped your scores rise if you owed too much money to other creditors. That's because the additional credit line would have expanded your credit utilization, which is the amount you owe in relation to the amount you can contractually borrow.

Credit utilization is second only to payment history in the way FICO scores are calculated, and the less debt you have outstanding the better. Therefore, when the account was closed and the credit limit disappeared, your credit utilization ratio most likely increased if you are carrying balances from other cards or loans.

To illustrate, imagine you have one credit card with a $1,000 credit limit, but have maxed it out. Owing 100 percent of the credit line would certainly affect your FICO score negatively. But if you were to open another account with a $5,000 limit, your credit utilization ration would decrease from 100 percent to almost 17 percent. The lower the utilization, the higher the credit score.

Now here's what you can do to reclaim those lost points. The key is to expand the difference between your current liabilities and the sum you can borrow. You can accomplish this in two ways:

  1. Reduce your balances on other cards, loans. Just send your creditors the most you can without charging any more for the time being. Do so and the debt will decrease, causing your scores to increase. To free up funds for bigger repayments, add to your income and pare down spending. Also consider selling off unnecessary items and sending your creditors the proceeds.
  2. Add a new account to your credit mix. While not ideal, it is a way to create a higher FICO score. It can work well, but only under the right circumstances -- if you can get a decent credit limit (which depends on your credit rating) and if you can avoid getting into any more debt (you shouldn't keep any balance on the account).

As soon as your utilization ratio broadens, your scores should rise. Wait about 30 days and recheck them. You should be happy with the result.

Whichever method you choose (and you can do both, by the way), go ahead and start charging again when your balances are down. Always pay on time and in full. Each month this activity will be recorded on your file and factored into your FICO score. This simple strategy is a guaranteed way to build scoring points, not just now but into the future.

See related: Closing 50 cards without damaging credit score

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Published: August 12, 2015

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Updated: 10-24-2016

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