Is "Account Closed by Consumer" a Negative on a Credit Report?

Understanding your credit report, and how your financial decisions and behavior influence your ability to get new credit, are important to your financial health. Some of the rules and guidelines that applied in the past have changed, and many consumers are unaware of how these new guidelines affect them. One such area is the reporting of closed accounts.

Definitions

When you read your credit report, your old, closed credit accounts are generally listed as closed by the lender, closed by consumer or charged off, meaning that you never paid the bill and the account was closed, and possibly sent to collections. Accounts listed as closed by the creditor usually mean that there were problems, such as with payments, and the creditor no longer wants to do business with you. Accounts listed as closed by you, the consumer, generally do not indicate payment problems.

New Guidelines

In the past, who initiated the closing of a credit account made a difference on your credit report. Accounts closed by a consumer affected the report far less than those closed by lenders. In recent years, however, as credit markets and consumer behavior have changed, who closes the account does not matter at all. The payment history on the account determines its effect on your credit. In addition, accounts closed by the creditor no longer automatically indicate payment problems. Some creditors have closed accounts that are in good standing due to lack of use or changes in the customers overall credit score, and many retailers that offered store credit cards have gone out of business, closing customer accounts in the process.

Payment History

Your overall payment history is a primary consideration when lenders determine whether to extend credit. If your payment history on a closed account is poor, and you closed the account yourself, it will negatively affect your credit. Opening and closing multiple accounts over a short period can also influence your credit report. For example, if you apply for multiple store-branded cards to get a shopping discount, pay the balance and then close the accounts on a regular basis, this can lower your score. How often you apply for and open new accounts, and your overall available credit, are factored into your credit score.

Credit Scores

Some people close accounts in an attempt to improve their credit scores. Before you close accounts, look at how much the account contributes to your overall credit picture. One determinant of your credit score is the ratio of debt to overall available credit. Closing a credit card account reduces your overall available credit and increases the debt-to-credit ratio, which may lower your score. So, while the fact that you closed the account yourself is not a negative in itself, reducing your available credit can hurt you.