Closing a credit card account can hurt your score by increasing your credit utilization ratio if you carry balances on other cards. But the account will stay on your credit report for 7-10 years, and it will continue to factor into your length of credit history.
Dear Keeping Score,
Hello, I am working on improving my overall credit score from 716. I have zero late derogatory marks and 1.2% revolving credit utilization. I am only 22 so my average credit age is 2.2 years. What can I do in general to improve my score to a 760-plus as soon as possible? Also, is it true that closed accounts will still be considered when calculating the average age of my credit? – Tyler
Congratulations on your stellar start on the credit score path. It’s a long one and while there will be bumps along the way, if you can continue on the same course by keeping your credit utilization ratio low and avoiding anything negative (like missing payments, etc.) those bumps will be minor.
That being said, the credit game requires a fair amount of patience. At 22, you are fairly new to credit and understandably want to get your score as high as possible, as soon as you can. Let’s talk about how it all works and then discuss what you can do now to improve your score.
First let me say that at 716, your score is considered good. In fact, scores between 670 and 739 are generally classified as good by FICO standards. The score you want to attain (760) is in the “very good” range. It’s perfectly understandable to want to achieve that score and higher. Just remember my “Theory of Good Enough Credit.” If your score is good enough to get you what you want, that’s all that really matters. Chasing perfection in scoring can become a fool’s errand.
How does a closed account affect your length of credit history?
So as to your question – a credit score uses an algorithm that has been proven to be able to predict future delinquencies. As a backward-looking model that predicts the future, it relies heavily on past performance as well as other current factors such as credit utilization and credit mix.
Let’s talk about how closing a card account affects your length of credit history, which makes up 15% of your FICO credit score.
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.
Why seven and 10? Because that’s what the customers of the credit bureaus want to see when underwriting consumers. If lenders suddenly wanted to see 20 years of history, the bureaus would do their best to provide it (and thereby increase sales of credit reports and other products).
The VantageScore model does not count closed accounts; only open ones are used to calculate credit age. So, the answer to your question is yes, closed accounts still count at least when it comes to your FICO score. The thing about credit history is that it is, well, historical.
It takes time to happen and there is no way to speed it up – there are no quick fixes for this piece of the credit score pie. However, I have included below some things you can do and not do to raise your score while you are waiting for your credit report to age.
See related: How long does it take to go from bad to good credit?
Closing a credit card can raise your credit utilization ratio
When an installment loan, for say a car or furniture, gets paid off that account is closed. However, I want you to think twice before closing a revolving account (like a credit card) just because you haven’t used it in a while.
Don’t get me wrong – there are good reasons to close revolving accounts, like a high annual fee or poor customer service – but generally speaking, I recommend not closing accounts especially for someone with a limited credit history.
While the closed account will still count toward your credit age in that part of the equation, if you close a credit card you may lose points in the credit utilization scoring factor, which counts for 30% of your FICO score.
Closing an account reduces your overall available credit, which is used in the utilization calculation. Utilization is figured two ways. First, the ratio of balance to credit unit is used, and second, the ratio of all your credit limits on all your cards to all your balances is factored in. Closing an account reduces the value of the second ratio.
Other ways to improve your credit score
Add positive data to your credit report
There are a couple of fairly new options that I like which may be attractive to someone in your position, like Experian Boost and UltraFICO. These are programs that allow the consumer to supply positive data in their credit report that can be used to increase scores. This is especially effective for people with limited credit histories. Both are simple to use and results are seen instantly.
To use Experian Boost you must allow the credit bureau to access to your banking information in order to pull things like utility and phone bill payments. Positive payment histories are incorporated in your report and can add points to your score.
UltraFICO looks at your checking and savings account information for positive data such as how much you have in savings, how active your accounts are and how long they have been open.
Both use only positive data and you can enroll or drop out at any time. Also, both only impact your Experian report, so keep that in mind. If you pay rent to a landlord that does not report to the bureaus, consider using a rent payment service that acts as a middleman when you pay your rent, enabling them to report positive rent payment history on your credit reports.
Mix up your credit card use
A word of caution – don’t fall in love with one credit card! I have a shiny metal card that I like the feel of and that draws comments occasionally when I use it. But I’m careful to spread my purchases over several, less glorious cards to keep my individual card utilization factor low. I suggest you try to not charge above 25% of your credit line. Super scorers keep utilization in the single digits.
See related: How many credit cards should you have?
Consider a passbook loan
You could also take out a passbook savings loan, especially if you are light in the credit mix department. While this only accounts for 10% of your overall score, it helps creditors to see that you can handle both fixed and variable payments. People with thinner files can certainly benefit from this practice.
I like passbook savings loans because they use your own money and you don’t have to worry about accumulating debt. Just be sure that the loan will be reported to the credit bureaus. If so, these are win-win propositions in my book.
I don’t know how soon “as soon as possible” is to you, but I recommend that anyone looking to secure funding for a major purchase to give themselves three to six months to clean up their credit reports first. And it goes without saying – but I’m going to say it anyway – during that time keep doing what you’ve been doing as far as keeping your utilization low and paying your bills on time, as agreed, every single time.
And remember that 50 points is a pretty big jump in credit scoring, but certainly not insurmountable. Don’t be discouraged if it takes longer than you’d like. You will get there.
Remember to keep track of your score!