Closing an account as a consumer is usually not interpreted as a negative item on your credit report by creditors. Usually, an account will be closed by a lender if there are problems with the account, so closing the account as a consumer is generally not indicative of any account problems. However, closing an account can have unintentional negative effects on your credit score.
The amount of credit you use as a percentage of the total credit you have available is known as your credit utilization. In terms of credit scoring, your credit utilization falls under the category of "amounts owed," which makes up 30 percent of your FICO credit score. Unless you have a zero balance across all of your credit accounts, closing an account raises your credit utilization percentage by eliminating part of your total available credit. For example, if you have a credit balance of $5,000 and total available credit of $20,000, your credit utilization is 25 percent. If you close a credit account with a $10,000 credit line, your utilization would immediately jump to 50 percent. In this case, closing the account would likely lower your credit score.
Length of Credit History
The length of your credit history makes up 15 percent of your FICO credit score. When you close a credit account, you may be shortening the average age of your credit lines, which would reduce your score. This is particularly true if the account you are closing has been open for many years. Your FICO score also takes into account the overall length of your credit history. If you are closing your oldest account, this may hurt your score down the road when the account falls off your credit report, typically in 10 years.
Types of Credit
Having a mix of various types of loans is good for your credit score. Ten percent of your FICO score comes from the type of credit you use, and blending installment loans such as car loans, retail charge accounts and revolving credit card debt helps. If you close your only credit card account, for example, your score could be hurt because you no longer have a blend of diverse credit types.
Overall, the effect of closing an account is usually not as important as your overall payment history. Even if your creditor was the one who closed your account, the fact that you made timely payments and did not settle your account for less than the full balance is what matters more. The FICO scoring model allocates 35 percent to your payment history, so keeping current on your payments is the single most important factor in your credit score.
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