All good things come to an end, including loans and credit card accounts. While many consumers are focused on the impact of negative accounts on their credit reports, not as many sit back to reflect on closing accounts and the benefit of those newly closed positive accounts.
Does closing accounts harm or help your credit scores?
The assumption is that good accounts are always good for your credit reports and credit scores. It’s the rare occasion where assumptions about credit scores are actually accurate, and this topic is yet another example of where you should be cautious about what you read.
Many consumers have caused serious damage to their credit scores by following the bad advice related to closing accounts that are still in good standing. Here’s the truth on closing accounts:
Old age is a good thing
Both the FICO and VantageScore credit scoring systems pay attention to the age of your credit reports. In fact, 15% of the points in your FICO scores are derived from a category known as “Time in File,” which includes the age related credit scoring metrics.
The two factors considered in the age are the age of your oldest account and the average age of all of the accounts on your report.
Credit scoring systems reward consumers for having older credit reports and an older average age of accounts. To put things more simply, older accounts can help to boost your credit scores. It’s always a bad idea to attempt to have old good accounts removed from your credit reports, and you’d be surprised to learn how many people attempt to do so by closing accounts.
A very common credit score myth, which refuses to die, is the idea that closing unused credit card accounts will lower credit scores since the consumer loses the benefit of the age of the account. This is not true.
You do not lose the benefit of the age of a credit card or any other type of account once the account is closed, as long as it’s still on your credit reports.
The age of closed accounts is still considered by credit scoring models when calculating your credit scores.
Closed accounts even continue to age. For example, if you closed a 10-year-old American Express card it’s still a 10-year-old credit card. And, in one year that 10-year-old card will become an 11-year-old card.
The bottom line is if you are successful having old accounts removed then your scores could go down considerably. Once the account is gone, it’s gone forever. You always want the old accounts to remain on your credit reports as long as possible, so closing accounts isn’t a good idea.
10-year rule before closing accounts
Unfortunately, closed accounts will not remain on your credit reports forever. The Fair Credit Reporting Act, or FCRA, has specific languages governing how long negative information is allowed to remain on your credit reports, general no longer than seven to 10 years.
The FCRA, however, is silent on the issue of how long positive accounts can remain on your credit reports. Legally speaking, this means positive accounts don’t have to be removed.
That’s good news but it’s counterbalanced with a little bad news. The credit reporting agencies as a matter of policy will remove inactive accounts after 10 years. So despite the fact that there is no legal obligation to remove the good stuff, there’s no obligation to maintain it either.
Prolonging the good
There are two types of credit accounts that are commonly utilized: Installment loans and revolving credit card accounts.
An installment loan is any account where you have a fixed payment for a fixed number of months, like an auto loan or a student loan. A revolving credit card account is a perpetual line of credit that can be utilized and paid down over and over with no end date.
Installment loans have a finite lifecycle, which means once you’ve paid off your car, student loan or mortgage the loan has been “exhausted.” From that date you can add 10 years and then it will be removed from your credit reports and there’s not much you can do about it.
Credit card accounts, however, don’t ever have to be closed if you manage them properly. If you always make your payments on time then there’s no reason your credit card accounts can’t remain open for decades. As the account ages it will continue to benefit your credit scores, so closing accounts won’t help your credit score.
If you do choose to close it some day then at the very least you can enjoy an additional 10 years of credit reporting benefits.