How closing old credit accounts could affect your score—Find out here

To maintain optimum financial health and a respectable credit score, it is imperative for you to understand the implications of closing a credit account on the integrity of your current credit score.

What is a credit score?

Your credit score is a numerical representation of your creditworthiness. It ranges from 300 to 850 and reflects your financial behavior. Issues such as payment history, loan repayment instances, credit usage, etc., are all factored into this score. Lenders use this score to assess the risk of lending money or providing loans to you. Simply put, a higher credit score indicates better credit health.

How closing a credit account affects your credit score?
 

Closing a credit account or a loan can have both positive and negative implications on your credit score. The impact depends on your individual situation.

• Credit utilization ratio: Closing a credit card reduces the overall credit available to you. If you carry balances on other cards, this can increase your credit utilization ratio, i.e., the percentage of your total available credit that you're using. A higher credit utilization ratio can negatively impact your credit score.
• Length of credit history: The average age of your credit accounts is carefully examined by credit bureaus. It's important to note that closing older accounts shortens your credit history, which can lower your credit score. Lenders tend to prefer a long and established credit history.
• Impact of credit mix: Having a mix of credit types, such as credit cards, home loans, personal loans, etc., can improve your credit score, provided you are regular with payments. Closing a loan account, for example, might reduce the diversity of your credit mix.
• History of earlier payments made: A positive payment history on a closed account continues to reflect favorably on your credit score. This helps build trust with lenders.

When will a closed credit account appear on your credit report?

The time it takes for a closed account to show up on your credit report depends on a few factors:

• Lender's reporting cycle time: Lenders typically report credit activity to credit bureaus on a monthly basis. It can take 30-45 days for the closure to be reported, depending on the lender's billing cycle. Sometimes new activity might take up to 3-4 months to reflect.
• Credit bureau processing time required: Credit bureaus such as Experian, CIBIL, and CRIF Highmark process data and update credit reports after receiving information from lenders. This processing time can vary.

Should you close your credit card account?

There are important things to consider before closing your credit card:

• If closing the card will significantly increase your credit utilization ratio, it might be better to keep it open (but manage it responsibly).
• Closing a long-standing and old account can negatively impact the length of your credit history.
• Ensure you pay off all dues before closing the account, as unpaid balances can severely damage your credit score.

Steps to minimize negative impacts

• Credit utilization must be kept low: Before closing a credit card, ensure you're not carrying high balances on other cards. This is crucial to avoid the possibility of a lower credit score.
• Credit score management: Regularly check your credit score to stay informed of any changes.
• Balances should be paid first: Clear all dues on the account before closing it. Re-check for confirmation.
• Maintain a good credit mix: Aim to have several credit types in your portfolio and manage them responsibly.

How to check your credit report

Many prominent websites provide free credit scores and reports. It's important for you to review your reports regularly to prevent errors and raise any discrepancies with the concerned financial institution to get them corrected.