RateCity.com.au
powering smart financial decisions

Does closing accounts affect your credit score?

Does closing accounts affect your credit score?

Your credit score is important because lenders, insurers and even employers 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:

Accounts that offer creditAccounts that don’t offer credit
Credit cards

Personal loans

Car loans

Home Loans

Bank accounts

Savings accounts

Term deposits

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. All you need to do is to ensure that you transfer your remaining balance and divert any direct debits, and even with a closed account, your credit score should remain unaffected.

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. Things can get worse if your bank closes your account "with cause", which usually means that your account was closed by the bank because you used the overdraft facility too many times.

Typically, closing a credit card can result in your credit score decreasing. But closing a credit card account 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 after the default grace period of 14 days are considered late, and they stay on your credit report for two years. Although one or two late payments do not affect your credit score too much, several late payments could indicate that you are in financial trouble, and this can affect your credit score significantly.

  • Payment defaults

If you are not able to make a payment within 60 days of when it was due, it is considered a default. Even a single default will have a severe 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:

  • Ensure that you make future repayments on time.
  • As far as possible, don’t 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.

Did you find this helpful? Why not share this article?

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

Advertisement

RateCity

More credit score articles

More articles? Read more here

Learn more about credit score