Will paying down closed card debt help my credit score?

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 CreditCards.com. 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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Dear Speaking of Credit
I went through some tough times and wasn’t paying on the credit card I have through my bank. The bank ended up closing the credit card account. I have been making payments on the “closed card” for about six months now. Is this helping my credit score in any way? Or is it making my score worse because I have a “closed” account?

No matter what I do I can’t seem to get my score above 640. I have another credit card I make regular payments on, and I have a personal loan through my bank that is on automatic pay each month. My husband and I want to buy a vehicle and a house within the next couple of years, but I would like my score to be above 700. How do I get there? – Aislynn


Dear Aislynn,
Let’s take a good look at how that closed card might be impacting your credit score now that you’ve been paying on time over the past six months, and what the future may hold. 

Fortunately, who closes your card – either you or the bank – has no influence on your score. Unfortunately, that’s about where the simple part of this discussion ends. We’ll start by examining how each of the three main credit scoring categories that together make up 80 percent of the score behave when a card has been closed:

  • Payment history (35 percent of the score). Whether you pay on time or late, it makes no difference to the credit score if the account receiving – or not receiving – the payments is open or closed.
  • Amounts owed (30 percent of the score). The credit utilization (balance/credit limit percentage) calculations making up most of this category can be seriously affected by whether a card is open or closed – and, as you’ll see, whether a balance remains after closing.
  • Length of credit history (15 percent of the score). Open or closed, the age of any account on your credit report is considered equally by the scoring formula.

Account status matters
Let’s now narrow our concern down to the amounts owed category, and credit utilization specifically. There are a couple of rules dictating which cards are included in these calculations. They evaluate both individual card usage and combined card usage.

Included in these utilization calculations are:

  • Open accounts having balances of $0 and up, and credit limits greater than $0.
  • Closed accounts having balances and credit limits greater than $0. 

Or, put differently, the following cards are left out of credit utilization calculations:

  • Open accounts with a credit limit of $0.
  • Closed accounts with a balance or credit limit of $0.

We know your closed card has a balance you’re paying down. What we don’t know is whether the bank lowered the credit limit to $0 when closing the card or left a limit. As you can see from the above rules, the presence or absence of a credit limit will determine how that closed card influences your score – particularly in the combined utilization calculations that look at your card usage in total.

Generally, if the closed card has a higher utilization percentage than your other card(s), your score should benefit by it being left out. Conversely, if the closed card has a lower percentage than the other card(s), it’s helping your score – and thus could hurt it by being excluded from combined utilization calculations. Again, utilization makes up almost 30 percent of your score, so whether this card is included or left out can be critical for your score.

It’s also helpful to keep in mind that even if the closed card’s utilization continues to be included in your score, that participation will only be temporary until the balance reaches $0. Then, since both a balance and limit are required for a closed card to be included in utilization, it will no longer be part of any utilization calculations.

Possible impact on credit history
Another score landmine that could be waiting much further down the road involves the length of credit history category. When the first late payment on the closed card reaches the 7-year-old mark, that account will be removed from your credit report entirely. And with it, the years you’ve had the card will be removed from the calculations that consider how long you’ve been using credit – particularly your average age of accounts

Most importantly, you should feel good that you are now paying all of your obligations on time.

  • Simply continuing to do so while lowering any remaining card debt will go a long way toward re-establishing a good track record and raising your credit score.
  • Be patient while your credit score slowly makes its way into the 700s during the next couple of years.

Rewriting history is a slow process, but it will be well worth the wait.

See related: Don't be hasty in closing unused account with $0 balance, Length of credit history: What it means to your score

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Updated: 11-24-2017