Credit Score: When does a closed credit account reflect in your credit score?
04 October, 2024 | 12:22 IST
Understanding when a closed credit account appears in your credit report is important for maintaining a healthy credit score. A closed credit account can have a noticeable impact on your credit score.
Monitoring your credit report regularly can help you stay updated on any variations in the score caused by a closed credit account.
A closed credit account refers to a credit facility, such as a credit card or loan, that has been fully paid off or closed due to any other reason. A closed credit account may impact your credit score either negatively or positively. For instance, a personal loan fully paid off may help in improving your credit score while a personal loan written off by the lender may result in a negative impact. While closing a credit account might seem like the end of a financial relationship with the lender, it still influences your credit score in various ways.
Many digital apps allow users to download detailed credit reports for free. Thus, you can check the details of all your active and closed credit accounts instantly. This can help you spot any discrepancies and report them to the credit bureaus in a timely manner. For instance, Moneycontrol via its app and website offers its users an option to get a free credit score and credit report.
How a closed credit account impacts your credit score depends on several factors, such as your credit history, type of credit account and your payment behaviour. Your credit score might be impacted by a closed credit account in the following ways:
Credit utilisation ratio: Your overall available credit limit decreases when a credit card is closed. Your credit utilisation ratio — the percentage of the approved limit you are using compared to your available credit limit — may increase if you still have unused balance or outstanding amount in your other accounts. Your credit score may suffer if your credit utilisation ratio is high.
Credit history length: The average age of your credit account is taken into consideration by credit bureaus. On closing long-standing accounts your credit history will shorten, which could affect your credit score. Since lenders like customers with a long credit history, terminating an account that has been open for a number of years may cause your score to temporarily decline.
Credit mix: Having a variety of credit types, such as credit cards, loans, and pay-later accounts or credit lines, can improve your credit score. However, make sure you manage your credit accounts responsibly to make the most of your credit mix.
Payment history: A consistent payment history on a credit account can continue to reflect favourably on your credit score even after the account is closed.
When does a closed credit account reflect on your credit score?
The time taken for a closed credit account to reflect in your credit score depends on these factors:
Lender’s reporting cycle: Usually once a month, lenders report credit activity — including credit accounts closed — to credit bureaus. The time it takes for the credit account closure to be reported could range from 30 to 45 days, depending on when it was closed in the lender’s billing cycle. New activity may sometimes take even 3 to 4 months to reflect in your credit report.
Credit bureau processing time: Credit bureaus in India, such as Experian, CIBIL, and CRIF Highmark, regularly process the data and update your credit report after receiving the information. Depending on the systems and procedures used by the bureau, this could take additional time.
Immediate vs long-term impact: While the closed credit account may be reflected in your report within a month or two, the credit score impact may take longer to become apparent.
Credit card closure: If you are closing a credit card, be mindful of how it might affect your credit utilisation ratio. At times, keeping the account open, can be beneficial as it adds to your account’s age, and also may also have a positive credit score impact.
Loan closure: A loan account is automatically closed when you repay a loan. A paid-off loan, however, may reduce the diversity of your credit mix.
Timing: Closing a credit account right before applying for a loan could negatively affect your loan approval as your credit score will be impacted in the short term. It is best to wait until after securing the loan before closing any accounts.
Minimising credit score impact when closing accounts
Keep credit utilisation low: Before closing a credit account, especially credit cards, make sure you are not carrying a high balance on other cards.
Monitor your credit score:Track your credit score on the Moneycontrol app to stay updated on any changes and report issues as they arise.
Pay off balances first: Ensure that all dues on a credit account are cleared before closing it. Unpaid balances or defaults can have a negative credit score impact that will stay on your credit report for a long time.
Maintain a good credit mix: Try to keep a variety of credit types in your portfolio, such as credit cards, auto loans or home loans. However, make sure you manage them responsibly.
To sum up, a closed credit account can both positively and negatively impact your credit score, depending on how it's handled. By monitoring your credit score regularly, you can minimise potential negative factors in your credit report.
Summary
Closing a credit account can temporarily impact your credit score. Credit bureaus refresh your credit report on a monthly basis, however, any new activities may take up to 3 to 4 months to reflect in your credit report.
Disclaimer
This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.
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