How To Close Credit Cards Safely
There are some legitimate reasons to close a credit card account. For example, you might want to cancel your credit card if you dont trust yourself to use your credit card responsibly. Another reason you might want to close a card is if the annual fee on your credit card is high, and its benefits dont offset the cost. You typically need to close joint accounts during a divorce or separation as well.
On the other hand, closing a credit card wont remove it from your credit report. So, if youre hoping to erase negative activity with an account closure, this strategy wont be effective.
If youve done your research and believe that canceling your credit card is in your best interest, there are steps you can take to protect yourself. The steps below detail the safest way to close a credit card from a credit scoring perspective.
- Step One: Pay off your full credit card balance and confirm that the balance is $0 with the issuer.
- Step Two: Cancel any recurring payments you have set up on the card.
- Step Three: Pay off all of your other credit cards before the statement closing date on those accounts.
- Step Four: Call the card issuer to close your account. Ask for written confirmation that your account balance is $0.
- Step Five:Monitor your three credit reports to make sure the card issuer updates the account to show it is closed with no outstanding balance.
The Difference Between A Closed And Charged
The main difference between a closed and charged-off account is that a closed account means the creditor has voluntarily agreed to close the account and forgive the debt. A charged-off account, on the other hand, means the creditor has given up hope of ever collecting payment and has sent the debt to a collections agency.
In both cases, the account will be reported as closed on your credit report. However, a closed account will usually have a positive or neutral impact on your credit score, while a charged-off account will usually have a negative impact.
If you have an account that has been closed by the creditor, there is no need to worry about it affecting your credit score. However, if you have an account that has been charged off, you should take steps to resolve the debt as soon as possible.
How Long Do Closed Student Loan Accounts Stay On Your Credit Report
How long a closed student loan account stays on your credit report depends on how you handled your monthly payments.
- Student loans in good standing: If you consistently made on-time student loan payments until you paid your loans off, your student loans can remain on your credit report for up to 10 years. Thats good news. Payment history has the most positive influence on your credit score.
- Delinquent and defaulted student loans: If you defaulted or had late payments on your loans, the negative information would be removed from your credit report after 7½ years from the date the loans were first reported as delinquent. However, if you discharge student loan debt in bankruptcy, then the bankruptcy will remain on your credit report for up to 10 years.
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How Long Does A Derogatory Account Stay On Your Creditreport
Derogatory accounts will generally stay on your creditreport for seven years but can show for as long as 10 years for some accountsand in some states. This will usually depend on the laws in your state and thetype of debt.
Bankruptcies, the granddaddy of debts, will stay on yourcredit report for up to 10 years in most states while foreclosures and studentloans will drop off after seven years. Tax liens and simple late payments willgenerally drop off after seven years.
Its important to understand when the clock starts tickingon different types of derogatory accounts and how that affects when they dropoff your credit report. This is usually the date the late payment or other badmark was added to your credit but can also be the date of your last payment orwhen the collection agency took over. If you make a payment plan with thecollection agency or they file a change to the debt, that might start the clockover and it could be another seven years before it drops from your report.
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Should I Try To Get Rid Of Closed Accounts On My Credit Report
Don’t try to remove a paid-off mortgage, car loan, credit card or other accounts from your credit report if they show a positive payment record. That good record will continue to help your credit scores.
If you have negative marks on the account, however, you want it off as soon as possible. You can use AnnualCreditReport.com to get free reports from the bureaus every 12 months to verify negative information has been removed as required by law. If a negative mark is lingering, you can file a dispute.
Many credit scoring models now exclude paid-up collections accounts. But because some lenders still use older scoring models, you may want to try removing collections from your reports.
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Your Credit Utilization May Increase
Your credit utilization rate is the portion of revolving credit youre using compared to how much you have available generally expressed as a percentage. If you close a revolving account, such as a credit card, the total amount available decreases.
When that happens, your credit utilization could increase, which may lower your credit scores. In general, most experts recommend keeping your rate below 30%.
How Does A Closed Account Affect Your Credit Score
A closed account on your credit report means that you can no longer use that account and that the account is no longer active. If you have a good credit history with the account, then closing it can actually hurt your credit score. This is because your credit score is based on your credit history, and closing an account means that you have one less account with a good credit history.
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How To Remove Negative Items From Your Credit Report
Amarilis YeraNorma RodríguezAndrea AgostiniTaína CuevasAmarilis Yera26 min read
Your is meant to be an accurate, detailed summary of your financial history however, mistakes happen more often than you may think.
Whether its accounts that dont actually belong to you or outdated derogatory information thats still being reported, incorrect information could be bringing your score down unnecessarily.
Read on to learn how to remove erroneous information from your credit report and some tips on how to handle those negative items that are dragging your score down.
What Is The Meaning Of Account Closed By Creditor On A Credit Report
Charlene Rhinehart is an expert in accounting, banking, investing, real estate, and personal finance. She is a CPA, CFE, Chair of the Illinois CPA Society Individual Tax Committee, and was recognized as one of Practice Ignition’s Top 50 women in accounting. She is the founder of Wealth Women Daily and an author.
Peter Dazeley / Creative RF / Getty
Your credit report includes a variety of information about your credit card accounts, including the status of each account. On closed accounts, your credit report may include a comment that indicates who closed the account and may say “account closed by creditor” if the credit card issuer closed your account.
Creditors have different reasons for closing your credit card account. For example, your card issuer may close your account if you become too delinquent on your payments, allow the account to be inactive for a long period, or if the creditor is no longer issuing that card.
Except in the case of delinquency, your credit report won’t show the reason that the credit card issuer closed the account, only that it was closed by the creditor.
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What Does Account Closed Mean On A Credit Report
If you have closed credit card accounts, your credit report will indicate whether the account was closed by you or by the account issuer. You might close an account because of fees or poor service. The account issuer might close one because of default, late payments or inactivity.
If closing a credit card account does sway your score, its most likely because of something called utilization. is how much of your available credit limits youre using, and it plays a big role in scoring. Closing a card removes its credit limit, so any balances you have outstanding now look bigger in comparison to the lower overall available credit.
Paying off a loan or closing a credit card could also have a small effect on your score if it lowers the average age of your accounts or gives you a slimmer mix of credit types.
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Closed Accounts And Credit Utilization
Use our tradeline calculator to calculate your credit utilization ratios.
Now that you know what a closed account is and why an account may be closed, you may be wondering what a closed account on your credit report means for your credit.
The main impact of closing an account on your credit is the effect on your utilization ratio. By closing an account, you are reducing your total available credit limit, which could increase your overall utilization ratio if you have balances remaining on your other accounts.
Therefore, if you have balances on any of your other cards, you probably dont want to close an account that is helping to keep your overall utilization down, as well as improving your ratio of low-utilization to high-utilization accounts.
On the other hand, if you pay down all your other credit cards to 0% utilization, you can safely close an account without impacting your credit utilization.
Try using our tradeline calculator to calculate your individual and overall credit utilization ratios and see how closing one of your accounts could affect your utilization rate.
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Are Closed Accounts On Your Credit Report Bad
Closed accounts on your credit report are not inherently a bad thing. In fact, they can often be a good thing, as we will elaborate on below.
Closed accounts on your credit report, unless they are derogatory, are not bad for your credit. In fact, they are probably giving your credit a boost.
However, derogatory closed accounts can definitely have a negative impact on ones credit.
For example, if you had a credit card closed due to delinquency, meaning the creditor closed the account because you had stopped paying it, the account likely still has a balance owed.
Having a closed credit account with a balance on your credit report could really hurt your credit. According to some sources, closing a credit account removes its credit limit, so a credit card account closed with a balance would be considered maxed out or over-limit.
However, other sources say that a closed account with a balance will be treated as an open account until the balance is paid off, at which point you can expect some damage to your score, especially if you have balances on your other credit cards.
The specific way that closed accounts are treated may depend on which is used to calculate your score as well as other variables in your credit profile.
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Do I Get Closure Notice
Your credit card issuer is not likely to tell you if it plans to close your account. However, if youve signed up with a , you may receive an alert. If that happens, call your issuer right away to see how to get your card reinstated. The issuer may restore your account with the previous terms, or it may request that you reapply for the card. If you lost points because of the closure, ask if those can be reinstated as wellalthough the issuer has no obligation to do so. If your card is restored with a lower credit limit, wait six months and then ask for an increase.
What Is Credit Utilization
You can calculate your credit utilization ratio using the following formula:
Maintaining a credit utilization ratio of 0% to 10% is best if you want to maximize your credit scores. But unless youre planning to apply for financing in the near future, a utilization rate of less than 30% may be sufficient.
Either way, youll want to pay your full statement balance by the due date every month to avoid expensive and to protect your credit score from late payments. If youre trying to keep the credit utilization on your credit report as low as possible, then the best time to pay your credit card is prior to the statement closing date.
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Why You Should Pay Off Closed Accounts
As youve probably gathered, its a good idea to pay off closed accounts with active debts if you possibly can. Doing so wont remove the account from your credit report and it doesnt have direct or immediate benefits for your credit score, but it can protect your credit from damage further down the line.
More importantly, it just isnt a very good idea to ignore outstanding debts .
Even if your creditor gives up on getting you to pay what you owe, theyll transfer your debt to a debt collector, and their efforts to make you pay up could throw your finances and credit into serious disarray.
If youd like to pay off a closed account but simply cant afford to do so, contact your creditor or debt collector. It might come as a surprise, especially if youve been getting a series of progressively pushier letters demanding that you pay up, but creditors and collectors generally prefer to handle things amicably. They dont want to end up in court any more than you do.
If you explain your situation, theres a solid chance theyll be willing to work out some kind of payment plan that will make clearing the debt from your closed account more manageable.
Takeaway: Paying off closed accounts will benefit your credit, finances, and your future lending options.
Victoria Scanlon
Can You Reopen A Closed Account On A Credit Report
You dont have a lot of options to re-open accounts closed due to delinquency. You can though ask that an issuer re-open an account that was in good standing but that you chose to close. The credit card company may update the status of the original account to open or make create a new account. You can ask which approach it uses. Reopening an old account can build on your established credit history.
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Closed Accounts And Credit Age
Many people believe that once an account is closed, it will no longer count toward your credit age. However, according to an article by in The Simple Dollar, this is a myth.
Not only will the history of a closed account remain on your credit reports, but credit scoring models will continue to consider the age of the account as well. And, even better, a closed account continues to age. So, if you closed a five-year-old credit card today in 12 months its going to be a six-year-old credit card.
How Long Will Derogatory Credit Last
Derogatory credit can follow you around for a long time. Some types of derogatory informationlike a bankruptcycan remain on your credit report for up to 10 years.
Most other derogatory informationlate payments and debt collection accountswill only remain on your credit report for seven years. Typically, these items will automatically fall off your credit report once theyre past the credit reporting time limit.
Only accurate, timely, and complete information can be included on your credit report. You can dispute an error or outdated derogatory item with the credit bureaus to have it removed from your credit report.
In some cases, having negative information removed can increase your credit score, but it depends on the rest of the information on your credit report.
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What Does A Closed Account Mean On A Credit Report
A closed account in bad standingIf you stop paying your debts, after a period of time the lender usually closes the account for further payments, writes it off and sell it to collection agencies or files a law suit against you.
When this happens, the account status changes to Closed. The account balance stays unchanged and reflects your remaining debt balance. The account becomes inactive, and you can no longer make payment to it.
That doesnt suggest that the debt is erased. While the original creditor is no longer trying to collect it from you, he may sell the debt to collection agencies, in which case the same debt will re-appear as a new collection account and will further damage your already damaged score. The Collection agency or the original creditor may even file a law suit against you.
Either way, a closed account in bad standing is considered a serious delinquency and will have huge impact on your credit score up to 100 points!
A closed AND charged-off account will remain on your credit report for 7 years and will impact your score whether paid, settled, or unpaid.
A closed account in good standingWhen you finish paying off a loan or close a credit card, the account is closed and the balance is set to $0. This is called a closed account in good standing.
Closed accounts in good standing appear on your credit report with a status Closed and a $0 Balance.
More about the effects of closing credit card accounts here.