Few things are more humiliating than trying to pay for an item with your credit card only to be told the card is declined. But in addition to the embarrassment this can cause you in a crowded store, the closed account can also impact your credit score.
A creditor may close an account because:
- The card is inactive with no outstanding balance.
- The creditor no longer offers the terms of the account.
- The creditor has reasons that may go undisclosed but that can include an issuer terminating the account based on information in your credit report.
Learning that your account has been closed can be startling because card issuers aren’t required to warn you when they plan to deactivate a card or sever your line of credit. Creditors are able to close an account for delinquency, inactivity, or default with no advance notice. And when the account is closed for some other reason, it’s only necessary for creditors to inform the cardholder 30 days after the account is closed.
How does having this information on my credit report affect my credit score?
Even when an issuer closes an account, the closed account can still affect your credit score in a couple of ways. The closure affects the average length of your credit history, which factors into your credit score. If the closed account was a longstanding one, it could negatively affect your score.
Your credit score could also be affected if your credit utilization rate—how much of your available credit you are using—is too high as a result of the closure. For example, let’s say you have two credit cards, and each card has a $1,000 limit. One has no balance, and the other has a balance of $500.
If the creditor closes the inactive card with no balance, your credit utilization rate jumps from 25 percent to 50 percent. Depending on your full credit profile, this can negatively impact your credit score because approximately 30 percent of your score is based on how much of your total credit line is being used (with a high percentage being a red flag to some lenders).
What can I do if an issuer closes my credit card?
Once a creditor closes your card, there are a few steps you can take.
1. Get a copy of your credit report. Check and make sure the account is accurately reported as “closed” or “closed at lender’s request.” Also scan your report for outstanding balances, and take steps to pay down these outstanding debts. This can help decrease your credit utilization rate and positively impact your score.
Keep in mind that closed accounts do not simply fall off your credit report, and you should periodically check your report to ensure that closed account information has fallen off your report after a certain amount of time:
- Closed accounts paid as agreed can remain on your report for up to 10 years.
- Closed accounts that have been charged off can remain on your report for seven years plus 180 days from the start of the delinquency that led to the charge off.
- Closed accounts in collections can remain on your credit report for seven years plus 180 days from the date the account first became past due.
2. Contact the credit card company. Ask for an explanation of why the card was canceled. Sometimes talking it over with a creditor can be enough to restore the account; other times the decision will stand.
Either way, by contacting the issuer directly you may be able to find out why the creditor closed your account—and you may also learn of any mistakes you made with this account that you should avoid in the future.
3. Take time to reassess your finances after the card is canceled. Whether your card was closed due to inactivity or because of late payments, it’s time to assess how you’re currently using credit. Should you be putting small purchases on your credit card and paying them off immediately? Or should you stop using your credit card entirely until you’ve paid down your outstanding balances?
After your credit account is closed, concentrate on adding positive information to your credit file. You can do that by paying your credit card bills on time, keeping your credit utilization rate below 30 percent, and making periodic purchases to prevent your credit card from lapsing into inactivity.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.