The road to a great credit score can be long and bumpy along the way. But if you maintain a low credit utilization rate and avoid any negative consequences (such as missed payments, etc.), these hits should be minor.
Keep in mind that the loan game requires a fair amount of patience, and if your score is good enough to get what you want, that’s all that really matters. Chasing perfection in scoring can be a pointless undertaking.
However, there are certain things that can affect your score, so it’s best to be aware of them and try to avoid them. Find out now how a closed account can affect your account and decide if you really want to close it.
How does a closed account affect the length of your credit history?
The credit score uses an algorithm that has been proven to predict future delinquencies. Being a retrospective model that predicts the future, it relies heavily on past performance as well as other current factors such as credit usage and credit structure.
Let’s talk about how closing a card account affects your credit history, which is 15% of your FICO credit score.
While your score will still include account history from all closed as well as open cards for as long as they remain on your credit report, credit bureaus remove closed accounts in good standing after about 10 years and closed accounts with a history late payments after seven years from the date of delay.
Why seven and ten? Because that’s what credit bureau clients want to see in consumer insurance. If lenders suddenly wanted to see 20 years of history, bureaus would go out of their way to provide it (and thus increase sales of credit reports and other products).
The VantageScore model does not account for closed accounts; only open ones are used to calculate the credit age. So the answer to your question is yes, closed accounts still count, at least when it comes to your FICO score. The essence of credit history is that it is historical.
This takes time and there is no way to speed it up – there are no quick fixes for this part of the credit score pie. However, below are some things you can do—and not do—to improve your score while you wait for your credit report to go out of date.
Closing a credit card can increase your credit utilization rate
When an installment loan, such as for a car or furniture, is paid off, this account is closed. However, I want you to think twice before closing a revolving account (like a credit card) just because you haven’t used it in a while.
Don’t get me wrong—there are good reasons for closing revolving accounts, such as high annual fees or poor customer service—but in general, I recommend not closing accounts, especially for those with a limited credit history.
While a closed account will still count towards your credit age calculation for this part of the equation, if you close your credit card, you may lose points in your credit utilization rate, which is 30% of your FICO score.
Closing an account reduces the total available credit, which is used in calculating usage. Recycling is considered in two ways. First, the ratio of balance to credit unit is used, and secondly, the ratio of all your credit limits on all your cards to all your balances is taken into account. Closing the account reduces the value of the second ratio.
Other ways to improve your credit score
Add positive data to your credit report
There are some fairly new options that might be attractive for boosting your rankings, such as Experian Boost and UltraFICO. These are programs that allow the consumer to provide positive data on their credit report that can be used to increase their score. This is especially effective for people with limited credit history. Both are easy to use and results are visible instantly.
To use Experian Boost, you must allow the credit bureau to access your banking information in order to receive things such as utility bills and phone bills. Positive payment histories are included in your report and may add points to your score.
UltraFICO looks at your checking and savings account information for positive data, such as the amount of your savings, the activity of your accounts, and when they were opened.
Both only use positive data and you can sign in or out at any time. Also, both of them only affect your Experian report, so keep that in mind. If you’re paying a landlord who doesn’t report to the bureau, consider using a rent payment service that acts as an intermediary when you pay rent, allowing them to report a positive rental history on your credit reports.
Confuse Credit Card Usage
A word of caution – don’t fall in love with one credit card! Instead, spread your purchases across multiple cards to lower your individual card’s usage rate. And try not to charge more than 25% of your line of credit – super scorers keep usage in the single digits.
Consider a savings book loan
You can also take out a savings loan in a savings book, especially if you are low on credit. While this is only 10% of your total score, it helps lenders see that you can handle both fixed and variable payments. People with thinner files can certainly benefit from this practice.
Passbook Savings Loans allow you to use your own money so you don’t have to worry about accumulating debt. Just make sure the loan will be reported to the credit bureaus. If yes, then this is a win-win offer.
bottom line
Anyone looking to get financing for a major purchase should first give themselves three to six months to clear their credit reports. And during that time, just keep doing what you’ve been doing to keep usage low and pay bills on time, as agreed, every time.
Also, remember to keep an eye on your score and don’t get discouraged if the climb takes longer than you’d like. You will get there.
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