How Closing Accounts Affects Your Credit Health

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How Closing Accounts Affects Your Credit Health

By JENNA LEE

At Credit Karma, we're often asked whether paying off a loan or closing a credit card will improve one's credit health. In fact, some people even ask when their score will go up after they've closed an account, assuming that there's no way doing so could be a bad thing. However, what many people don't realize is that maintaining debt can be good for your credit health if you manage it responsibly. Making timely payments proves that you're a reliable borrower and can increase your creditworthiness in the eyes of potential lenders.

While it's impossible to pinpoint exactly how many points your score may go up or down, let's explore how closing an account could impact your credit health.

Closing a Credit Card

Simply put, closing your cards definitely has the potential to hurt your credit health. Here's why:

  • May increase your credit card utilization rate. Your credit card utilization rate is the ratio of your credit card debt to your total credit card limits. When you close a card, you reduce your overall available credit. Unless you also curtail your spending, this will increase your credit utilization rate, which could hurt your credit health. Many scoring models consider your utilization rate highly important, as it's a quick and easy way to gauge how you're managing your credit and whether you'll be able to pay off your debts in the future. In general, it's best to utilize between 1 and 20 percent of your total credit limit, as this shows lenders that you're using credit but aren't dependent on it.
  • Could lower your average age of accounts. While closing a credit card won't impact your average age of accounts right away, as closed accounts remain on your report for seven to ten years, if you close a card that is significantly older than your other cards, it could lower your average age of accounts when it finally falls off your report. Additionally, some credit scoring models may use only the average age of open and active accounts as a factor, which is why we only use your open accounts when calculating your average age of credit history on Credit Karma. While your average age of accounts isn't typically the most important factor used to calculate your score, it does matter and can negatively impact your credit health if it falls.

However, like most things in life, closing a credit card isn't entirely negative--it also can have its advantages. For example, if your card has an extraordinarily high interest rate or miscellaneous fees, the money you save by closing it may be worth any negative effects on your credit health. Alternatively, if you have a shopping addiction or an unmanageable debt load, it could make sense to close some cards to minimize your temptation to spend and rein in your spending. Of course, all of these pros and cons can vary based on your particular situation, so it's important to consider any additional factors before making a final decision.

Paying Off a Loan

While paying down credit card debt lowers your utilization rate and can benefit your credit health, paying off an installment loan like a mortgage, auto loan or student loan works a little differently, as doing so closes the loan. As mentioned earlier, closed accounts will still appear on your credit report for seven to ten years, but some models may only look at open and active accounts rather than closed accounts. In addition, when your loan does fall off, it could shorten your credit history and reduce your types of credit accounts. Keeping all of these factors in mind, it may be more prudent to manage your account through the term of the loan to show lenders that you're able to maintain your accounts responsibly over a long period of time.

With that said, paying off loans also has some obvious benefits. Less debt results in a more flexible cash flow, meaning you'll have more money to contribute to your emergency fund, retirement accounts and/or other savings accounts. In addition, paying off loans can lower your debt to income ratio, a factor that has a significant impact on your ability to get credit.

Bottom Line

If you've recently paid off a loan or closed an account, it's best to educate yourself on how your credit health may be impacted so that it doesn't come as a surprise. You can use Credit Karma to continually monitor your credit report to stay on top of significant changes and ensure your information remains error-free.

In the end, while paying off a loan or closing an account in good standing may not necessarily improve your credit health in the short term, you should feel proud about sticking it through and making good on your promise to pay that money back. By paying off your debt, you've shown that you're a reliable borrower, and potential lenders will see that positive payment history for years to come. Congratulations and good luck in the next chapter of your credit journey!

About the Author: Jenna Lee is Credit Karma's Copy Editor. Although her specialty lies in creating witty post-it notes, she also enjoys sharing all the financial information she's learned since joining Credit Karma in February 2012. When she's not working, you can probably find her trying out a new dessert recipe or learning/perfecting any musical instrument she can get her hands on. Say "hi" @leejennaa!

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All Comments

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1 Contribution
177 People Helped

Helpful to 177 out of 193 people

How can paying off a car loan 2 years early drop my credit score 50 points?  That has got got to be the stupidist way of looking at credit utilization in the world. Thay should be raising people's scores who pay off their loans early not penalizing them! Beyond Stupid!

Top Contributor

Reply by
caligeekgrrl

16 Contributions
223 People Helped
Helpful to 34 out of 44 people

Besides "closing" an older account, I wouldn't be surprised if creditors wouldn't like getting less interest pay for those last two years you avoided. 

Reply by
wildflower5

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Helpful to 75 out of 82 people

You must rember that Banks Auto dealers etc. would like you to string out those payments forever as the interest puts more  money in their pockets. You are right,. BEYOND STUPID!!!

Reply by
htolooi

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42 People Helped
Helpful to 42 out of 45 people

Agree 100%.  I guess, the system is designed to keep you hanging one way or another.

Reply by
Iliarivera

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0 People Helped

Because there is no way to please this people... I think this is a total scam... and even if you meet your dues on time...or if you have a lot of open accounts eventhough you pay them... the score does not help at all... 

Reply by
butterflysbeauty

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I agree totally,, You should not be pentalized for paying off early..

Reply by
Sandman619SD

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Helpful to 1 out of 1 people

Credit scores are a statistical look at the general populace, not a comment on the individual.  Like auto insurance where each person becomes a statistical break down of life's events, this is how a credit score formula functions.  After paying off a 12-month no interest rates furniture purchase, my CC's FICO score flagged the lack of a current installment plan as the reason why my credit score is lower than it could be otherwise.  Their scoring system needs to view your abiliity to cointinue those payments & without that, the score is reduced.  

Similar to closing an account, that changes your ratios of income to credit available.  I guess that it's all a show, really.

Reply by
espo2199

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0 People Helped

I closed a mortgage and mine dropped 50 points as well.  This is the stupidest system I have ever heard of.  How can paying off a $200000 be a bad thing.  Unbeleivable.  It's more than beyond stupid.  What's worse, they look at stuff from the early 2000's.  that has about as much to do with my life today as the clothes I wore back then.  Another beyond stupid part of this messed up sdystem.

Reply by
lmrwoody

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0 People Helped

I closed 3 credit cards with a score of 750 about a month later my credit score dropped to 672. I never missed a payment and thousands less in debt. Why? What's your purpose of being a credit bureau? I feel for you esimpson 133 and I wish there was law that prohibits these bureaus from doing this.

Reply by
mdcarver

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Enter Your Replytotally agree.

Reply by
conlar

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Enter Your ReplyThe credit scoring process is a reflection of the credit values the younger generation was taught in schools with liberal teachers. Their idea of credit worthiness is, staying in debt enhances your value to lenders. In my day a history of paying off debt early proved your credit worthiness. Oh how I wish the good OLD DAYS were still here, when things made sense!

Reply by
Cliffy67

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0 People Helped

I totally agree.  I never missed a payment, followed through on my loan, paying extra every month, and laid my car off 2 years early.  My credit score dropped almost 50 points.  My car was then totaled and I had to buy a new one.  I had to pay a higher finance rate because I paid off my car early and my credit score was lower (went from 755 to 705).  It's all a rip off.  

Reply by
awpowell

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0 People Helped

You are always better to close a cc account or loan account once you pay it off. Potential debt hurts too! The credit utilization bologna is just that. Its never good to borrow money and pay it back later. Most wealthy people do not have monthly payments, pay cash for things and live on less than you make. Credit cards are a cancer don't be fooled by fancy wording of utilization ect and age of accounts opened as a means to help you. If you play with fire you will eventually get burned. Steer away from plastic altogether, pay cash or if you do use plastic make sure its just a debit card.

1 Contribution
43 People Helped

Helpful to 43 out of 45 people

I just completed a 5 year car loan with Ally bank, Never late in 60 months, I was hoping when I satisfied the loan it would prove to show that I have successfully paid off the loan and it would increase my credit score. I was astonished to see my score drop. This was not a credit card account, it was a car loan, therefore I had no choice in the matter. When the loan was satisfied, Ally closed the account. How on earth would this show me to be less creditworthy? This is idiotic and defies logic.. it staggers the imagination.. 

Reply by
CBetc

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16 People Helped
Helpful to 15 out of 21 people

Pretty simple: One aspect of your credit score (at least most scores) is your "credit mix"... Although prior evidence is nice, creditors want to see that *right now* you're able to handle a variety of different types of credit, including revolving, bank cards, installment loans, auto loans, a mortgage, and maybe a student loan. The more variety you have, the more evidence you know what you're doing.

Some models, as people have written above, only look at (or greatly prioritize) currently-open accounts.

The best advice I can give is for people to keep their auto-loans open as long as they can. I have a 4 year loan with Chase that's had <$200 left on it for the better part of the last year. Why? To keep it open and reporting.
 

If you've paid off your car and don't look to be getting another one any time soon, perhaps you have a son or daughter you could finance? How much it will affect you will depend on your individual credit mix.

1 Contribution
99 People Helped

Helpful to 99 out of 107 people

I closed a credit card and my score dropped 41 points!! I didn't even have a balance. I just didn't want to pay the annual fee. So is this their way of making you keep the card? Disgusting

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Reply by
CKCharmaine

512 Contributions
1065 People Helped
Helpful to 48 out of 57 people

Closing your accounts changes your credit profile, so it naturally can have an impact on your score. It's probably better in the long run to not spend money on annual fees anyway.

Reply by
alive5050

2 Contributions
97 People Helped
Helpful to 65 out of 73 people

This only harms your score if you close any of your cards other than your newest one. The credit history is an average so you need to close them newest to oldest to keep your average old. The older your average, the higher your score.

Reply by
xuegui

2 Contributions
66 People Helped
Helpful to 66 out of 67 people

I closed a credit card also. My average age of accounts changed by a fraction of a month and my utilization rate stayed <10%, yet my score dropped. This article is incorrect. Your score WILL drop if you close a credit card, regardless of other metrics.</p>

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Reply by
caligeekgrrl

16 Contributions
223 People Helped
Helpful to 1 out of 1 people

I closed one of my oldest accounts and it lowered my credit score. How much it changes your score depends on a factor of the age of each individual account and their credit limits and how old the card you closed was. My score dropped a chunk, but most of my credit is 3 years old at the most. The credit limit for that card didn't really affect my score because it had a low limit compared to my other cards. I just couldn't rationalize keeping a card that cut the annual fee into monthly pieces, and charging interest on those monthly pieces even if the balance was paid in full. They wanted to be paid for every limit increase they offered.

If the card company's practices are a gip, take the dive and have patience for your score to go back up. Only time will heal the time lost on your credit report.

Sometimes card companies will let you ask for credit limit increase. I found this a great way to bump my score back up a few points.

And the number of on-time payments counts towards your score as well. I try to charge all my cards at least once a month, then paying them back to $0, increasing the number of on time payments that get added every singe month. A spreadsheet type program that I update with current balances, etc, has helped me up my score by 200 points in 2 years.

Reply by
Nkdamptey

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0 People Helped

Enter Your ReplyWhy should closing an account affect your score.  The number of years you had the card should remain and used in what ever algorithm they use.  Not counting the time you held the card after you have closed it is NOT representative of ones true credit history.  I closed ou all my credit cards and kept my AMEX my score dropped over 100 points.  

Reply by
mdcarver

8 Contributions
166 People Helped

Enter Your Reply  Is there anykind of an answer to all this stupidity?

2 Contributions
75 People Helped

Helpful to 75 out of 96 people

The best way to increase your credit score is to put all your credit card debt on an instalment loan. You will be amazed how much this shoots your score up.

Reply by
csufresnogirl

1 Contribution
17 People Helped
Helpful to 17 out of 21 people

Does that mean you take out a personal loan to pay off your credit card debts?  So you would no longer owe credit cards but just the personal loan?

Reply by
alive5050

2 Contributions
97 People Helped
Helpful to 32 out of 35 people

This may help your credit but it could be bad advixe if you have to use collateral to secure the installment loan. Converting unsecured debt (credit cards) to secured debt is a bad idea. Imagining losing your vehicle or other collateral asset for falling behind on payments.

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Reply by
caligeekgrrl

16 Contributions
223 People Helped
Helpful to 13 out of 17 people

That would be a temporary thing, the the length of that loan. When that loan's paid off, there go the years that had added to your credit score.

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Reply by
BSFfaithful

17 Contributions
36 People Helped

I agree 100%. Credit benefits the credit card company when it receives interests and keeps the borrowers hanging.  At least one sees an end date with personal low-interest loans.  I want to get like my brother, who is wealthy and says that he does not need a credit score because he can afford to purchase with cash.

Reply by
tim34446

7 Contributions
4 People Helped

this is stupid advice

Reply by
awpowell

2 Contributions
0 People Helped

You are always better to close a cc account or loan account once you pay it off. Potential debt hurts too! The credit utilization bologna is just that. Its never good to borrow money and pay it back later. Most wealthy people do not have monthly payments, pay cash for things and live on less than you make. Credit cards are a cancer don't be fooled by fancy wording of utilization ect and age of accounts opened as a means to help you. If you play with fire you will eventually get burned. Steer away from plastic altogether, pay cash or if you do use plastic make sure its just a debit card.

1 Contribution
27 People Helped

Helpful to 27 out of 27 people

I closed a credit card that had a bad payment history. While those missed payments are still on my report my equafax score went up 47 points because I now have 100% on time payments on my open accounts. 

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Reply by
TeamCKJen

366 Contributions
559 People Helped
Helpful to 3 out of 4 people

Thanks for sharing!

Reply by
joeop

3 Contributions
4 People Helped
Helpful to 3 out of 5 people

Smart

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Reply by
BSFfaithful

17 Contributions
36 People Helped
Helpful to 6 out of 7 people

Wish I could get those old lated payments dropped from old missed payments.  I only had one missed payment on two different cards several years ago but all credit bureaus keep me at just below 100% on-time payments because of these two cards.

1 Contribution
9 People Helped

Helpful to 9 out of 10 people

This credit quantification site is ridiculous and moreover, is an abuse of power via the internet.  Example:  I had flawless credit from the time I first began earning money, as a newspaper boy and right on through my career culminating as Chairman and CEO of an international environmental science & technology firm, for decades.  My family suffered a mass shooting in Virginia in 2010.  We lost four immediate family members, in addition to the other family who lost four and the shooting down of a state police helicopter, wounding its state policeman pilot.  As a result, I took my parents into my home to help with their grieving of the loss of my brother, sister in law, their fifteen year old daughter and her sixteen your old beau.  In so doing, I ran up numerous bills, which I kept current and acquired four credit cards to help me keep a lot of balls in the air during the five years which followed. I stayed 100% current on all the cards, nothing was paid late.  Upon my parents' deaths, within fifteen months of each other, I was finally able to get back to work and earn enough money to payoff all the cards, down to ZERO; yet, have kept the cards just in case another unexpected event takes place.  Yet, my credit score has improved only to "Fair".. 

I've never defaulted on or been late with a loan or payments, including seven figure homes, etc., or any other form of credit; nor have I ever been late on paying amounts due. Can banks made the same claim?  No ~ they fail, get bailed out by the taxpayers and keep rolling along. Simply shameful, would be putting it lightly. 

It's all a bad joke and those responsible for the aforementioned should be ashamed, if not of themselves, at least the credit reporting industry with which they're involved. 

8 Contributions
42 People Helped

Helpful to 33 out of 35 people

Is what I do know is as long as you pay off your credit cards on time, or pay the full amount and keep a ratio of 10 to 30 persent your score will go up.

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Reply by
CKCharmaine

512 Contributions
1065 People Helped
Helpful to 5 out of 9 people

Thanks for sharing your experience, dinsureone!

1 Contribution
18 People Helped

Helpful to 18 out of 19 people

Simply remember: It's not a credit score, it's a debt score. The entire system was designed by, and in the interest of, bankers. Just as in politics and international affairs, always ask yourself: cui bono? Who benefits?

Obviously, as so many here have pointed out, it is clearly to one's advantage to not be in any debt. Thus, paying off any/all debt should be a positive. But it often isn't. Why? Because it's not about what's advantageous for you or me. It's what benefits them. The more debt we're in, the more money they make. And it also serves as a form of social control: debt servitude.

Reply by
mauriceeaton

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1 Person Helped
Helpful to 1 out of 1 people

Just see my post above yours... 

Reply by
SweetP313

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Helpful to 1 out of 1 people

Enter Your     Thank you so much for that REALITY CHECK!!!! So many people get caught up and can't see the forest for the trees. Thank you !! Thank you thank you!!

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11 People Helped

Helpful to 11 out of 12 people

So does your credit score come down when the credit card company doesn't renew your credit card from lack of use... like no use in 3 or 4 years?

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Reply by
CKCharmaine

512 Contributions
1065 People Helped
Helpful to 11 out of 12 people

Regardless of who closed the account or why it was closed, a closed account may increase your utilization rate and shorten your average age of credit history. That doen't necessarily mean your credit score will always drop, but other factors of your credit health can be impacted.

Top Contributor

Reply by
caligeekgrrl

16 Contributions
223 People Helped
Helpful to 4 out of 4 people

If the account is not renewed, the account is closed, and affects your credit no differently than if you had closed the account yourself. Total credit limits drops, average account age drops, credit utilization increases. How much these affect your score depends on the number, age, limites and utilization of all your other card accounts.

Reply by
willf67

1 Contribution
2 People Helped
Helpful to 2 out of 2 people

yes it could. better to use every so often and pay off before interest just to keep it "active". I use my oldest card once a year or so for an everyday purchase, pay off in full beffore due date to avaid interest.

1 Contribution
2 People Helped

Helpful to 2 out of 2 people

Soooo I paid off my car loan and filed a dispute to have the balance reflect 0. However they closed account and removed it. My credit score DROPPED 15 points. All I wanted was the balance to reflect 0. Now what do I do?

Reply by
Skinner904

1 Contribution
0 People Helped

A balance of zero would mean the account would then be closed. An auto loan being paid off will always be closed by the financial institution that you opened it with. This can factor into your overall average credit age.

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