Does closing accounts affect your credit score?

Your credit score is important because lenders and insurers use it to estimate how well you manage your finances. Many factors affect your credit score, but some of the significant ones are:

• the length of your credit history;
• the amount of debt you have;
• the number of credit applications you have made; and
• your repayment history.

Closing different financial accounts may have different effects on your credit score, depending on the type of account closed and provided you take necessary precautions.

What are the different types of accounts, and how do they affect your credit score?

Broadly speaking, there are two types of accounts - those that offer credit and those that do not.

Here are some examples of common financial accounts that do or do not offer credit:

If you close an account that does not offer credit, such as a savings account with a debit card, it will not affect your credit score. Remember when closing an account like this to ensure that you transfer your remaining balance and divert any direct debits.

When it comes to credit accounts, things are a bit more complicated. Closing an account with overdraft protection or a line of credit may affect your credit score negatively, especially if you close it with an outstanding balance, like an overdraft fee.

Typically, closing a credit card doesn’t always have a negative impact on your credit score. For example, if you have a substantial credit limit over multiple cards, and this isn’t balanced by your income, cancelling a credit card account will reduce your liability and have a positive effect.

Since it does, closing accounts may increase your credit score. But if you have frequently transferred your outstanding to other cards before cancelling them, it will have a negative effect on your credit score.

Regarding other accounts that offer credit, like personal loans, home loans and car loans, closing such accounts after successful repayment provides proof of your ability to repay debts. This reflects positively on your credit report and will improve your credit score. Late payments and defaults, on the other hand, will harm your score and may stay on record for several years.

How do late payments affect credit score?

There are two types of ways you can impact your credit score via missing payments.

• Late payments

Payments made more than 14 days after they are due are considered late payments. These payments are flagged on your credit report for two years. Late payments apply no matter how small they may be - even if they’re just a few dollars.

• Payment defaults

If you are not able to make a payment that is over $150 60 days after it was due, it is considered a default. Even a single default will have an impact on your credit score and stays on record for five years.

What can you do if closing your account has decreased your credit score?

Fortunately, even if closing an account has affected your credit score negatively, there are several things you can do to repair the damage, including:

• Ensuring that you make future repayments on time.
• As far as possible, try not to apply for new credit cards or loans.
• Consider lowering the limit on the credit cards you have.
• Check your credit report regularly and correct any wrong entries immediately.