Using the data from your credit report, a credit score is generated by an analytics organization, namely FICO. This score appears as a single number, ranging between 300 to 850.
Having negative data on your credit report will adversely impact your FICO score. Therefore, it is important to know what happens to your credit score, and what appears on your credit report when you close an account with a balance remaining.
How Closed Accounts With Balances Can Affect Your Credit Score?
Many lenders maintain hard-and-fast FICO minimums for approval, particularly in the mortgage industry. Closed accounts with balances are viewed as maxed out. This has a negative impact on your FICO score, as scores are calculated by FICO using percentages to determine the weighting of the chosen categories. In general, the weighting is as follows:
- Payment history – 35%
- Accounts owed – 30%
- Length of credit history – 15%
- New credit – 10%
- Credit mix – 10%
As you can see, accounts owed constitute a large percentage of the score. This refers to the amount of money an individual owes.
What Does A Closed Account With A Balance Mean For Credit Report?
A closed account with a balance shows on your credit report as an account that has been closed, either by the credit grantor (“issuer”), or the consumer (you). The credit issuer will continue to report the account’s history as well as your current payments. If you made all your payments on time while the account was active, that information will usually be reported for 7 years.
The Fair Credit Reporting Act set forth by federal law ensures that late payments, or other derogatory information can only show up on your report for seven years.
Why Do Closed Accounts Affect Credit Score?
FICO and VantageScore, the two largest credit scoring companies, factor in the amount you owe on your credit cards relative to your total available credit limits. If the card is closed, the credit will be dissolved. Consequently, losing access to the credit line will affect your credit utilization ratio when there is outstanding credit card debt.
Having negative data on your credit report will adversely impact your FICO score. Closed accounts with balances are viewed as maxxed out. This has a negative impact on your FICO score. Whether you close an account or the credit card company does, the balance will remain your responsibility until you’ve paid it off, or have taken legal action.
If you do want to close an account with a balance due, instead of placing it safely away from use, and removing the account information from your devices, then you can speak to your issuer and make a verbal request.