You may hear that removing a closed account from your credit report is an intelligent move everyone should make to increase their credit scores. Well, it is not as straightforward as it sounds, and in fact, it could be counterproductive.
A closed account is any account that has been terminated or deactivated. For instance, you could ask your bank to close an unused credit card, or once your mortgage is repaid in full, your lender will close the account, and it could stop reporting that record to the credit bureaus.
The action of closing is an act of vanishing. Once something disappears, it no longer impacts someone’s credit score for the good and the bad. Let’s talk more about this concept.
How is credit score calculated?
A credit score is a number that reflects one’s creditworthiness, and it is based on mathematical operations performed by a computational algorithm that considers these factors: Payment History, Amount Owed, Length of Credit History, Credit Mix, and New Credits. Closed and remove accounts impact four of those categories.
For instance, closing a credit card implies subtracting that credit limit from your total. Imagine having a combined credit limit of $10,000 in three cards and removing one of them with a $2,000. Immediately, that action will leave you with a new combined limit of $8,000. Therefore, your credit utilization rate will go up while your score will go down.
Think about your car loan. After finishing payments, your car dealer or the bank closed the account, but also could stop reporting that record to the bureaus, meaning that a good history full of on-time payments wouldn’t be available. And, of course, your credit score will drop.
Another factor to consider is that the average length of your credit history will be affected negatively too when removing accounts.
Welcome to the other side
But always, a coin has two sides. If a closed account for a credit card, mortgage, or car loan is packed with late or missing payments, maybe erasing that unflattering behavior from the report is favorable and convenient move.
By now, you are more aware of the implications of a closing account in your credit report. Now, you may be asking how long a closed account remains on the credit report. It depends, but the data will be feeding algorithms for around seven years.
Which course of action is the best to take, it varies in every case. To help you pick the right option, an expert eye comes in handy.
Once the convenience of closing an account is established, it is time to proceed by formally disputing negative or inaccurate information by communicating with credit bureaus or asking them to remove a closed account.