Do Closed Accounts Count As Debt?

Borrowers should be interested not only in how they create liability for themselves, but also for how they end it. What types of debt individuals are currently paying is very important in regard to credit ratings and credit scores, but debts that have recently ended are also included in the calculation of the most important credit scores. Closed accounts, or debt accounts that have been shut down by the creditor that holds them, can have far-reaching effects on financial decisions, but they are rarely considered to be debt once they are shut down.

Closed Accounts

A closed account is simply an account that once held money due on a loan, but is now defunct. For instance, when a lender creates a mortgage, the mortgage account holds all the money due on the mortgage, money the lender will receive as profit when the borrower pays. As the borrower continues to pay, the amount steadily shrinks, the payments subtracting from the total. In the end, when the account has reach a zero balance, the lender closes it. This is an ideal situation -- many debt accounts are also closed because debtors cannot pay off their loans.

Closing Old Accounts

An old debt account is one that has been active for some time, typically over a year but also for much longer in the case of large loans. These accounts have a beneficial effect on credit reports. They do not count as debt -- on the contrary, a borrower who pays off these accounts and has them closed will see an increase in credit rating as a result. From a credit perspective, it shows that the borrower is capable of seeing a debt through to its conclusion.

Closing New Accounts

Just as paying off old debts can have a positive cumulative effect on credit, closing new debt accounts can have a negative effect. An old debt account has a history of payments behind it, proof that the borrower has the capability to pay. When lenders see that a new account has closed, they tend to assume the borrower's mind changed, or that the borrower realized payments could no longer be made. This will often lower credit scores, which is why borrowers should not open and then close credit card accounts in an effort to raise their scores.

Lender Decisions

In the case of a large account, lenders often have control over how it is closed. If an account is closed and marked as settled, that means that instead of being paid in full, an agreement was reached with the debtor regarding the remaining debt, such as a short sale. This is still not debt, but will have a negative impact on credit. Accounts closed as defaulted will have an even worse effect, but lenders will typically forgive any remaining debt regardless, removing the liability itself.