How Closing an Account Could Affect Your Credit Score

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By , Staff Writer
Posted on Mon Aug 2, 2010, Last Updated on Mon Aug 2, 2010

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Your credit score is an intangible asset that exhibits your financial credibility. Many consumers want to protect it and keep the score as high as possible, which is understandable because a high credit score means lower interest rates on loans — the equivalent of thousands of dollars in savings on long-term loans such as mortgages and auto loans.

With recent financial reform pushing banks to revise their lending practices, consumers are facing increased credit card interest rates, reduced credit limits, and abrupt card cancellations. These changes are causing consumers to pay additional attention to their credit reports and scores.

Consumers must now worry about how each change to their financial accounts will affect their credit score — primarily what happens when they want to close certain accounts.

Here is a breakdown of how closing these particular financial accounts could affect your credit score:

1. Savings Account

Closing a savings account does no harm whatsoever to your credit score. There is no credit line tied to this type of account so it doesn’t show up on your credit report. Because credit scores are calculated with the data on credit reports, what isn’t reported isn’t included in the calculation.

Instead, you could find your personal banking report at a website such as ChexSystems.

2. Checking Account

Like a savings account, closing a checking account does nothing to your credit score. Despite being able to swipe as “credit” with a debit card, a credit line does not exist on the checking account.

While closing a checking account won’t directly hurt your credit score, there are other ways that your checking account can impact your credit score in a negative way.How Closing an Account Could Affect Your Credit Score

3. Credit Cards

Credit card accounts are obviously included in your credit reports and will definitely play a part in credit score calculations. The top-secret formulas for calculating credit scores vary depending on the credit bureau or agency from which you retrieve these scores.

Although the scoring methods may be different, they are comprised of five basic factors: payment history, debt level, length of credit history, inquiries, and mix of credit. Closing a credit card account would affect the debt level and length of credit history parts of the credit score equation.

Credit score calculations take your debt utilization ratio into account. This ratio reveals how much of your available credit you are using. When you close a credit card, that credit line disappears and your total credit limit is reduced, leading to an increase of debt utilization. If you have absolutely no debt, your debt utilization ratio would remain at zero and have a minimal effect on your credit score.

In addition to debt level, the age of the credit card account matters as well. A long credit history is favorable because it exhibits long-term responsibility. According to FICO, the leading credit scoring company, the age of the oldest account, the age of the newest account, and the average age of accounts are included in the calculations. A closed account’s age and payment history will remain on the credit report for up to a decade but will no longer contribute to the increase in average age of credit accounts as time goes on.

 

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