Lenders use FICO scores calculated by Fair Isaac Corp. when determining how much of a lending risk you present to the company. If a credit card company closes one of your accounts, your FICO score suffers in a variety of ways. According to the Fair Credit Reporting Act, the closed credit card account will remain a part of your credit history for seven years from the date your credit card provider canceled the account.
Facts
Credit card companies have little reason to close your credit card account unless you stop making payments on the card. After 180 days pass without your making a credit card payment, the company will likely charge off the debt and cancel your account. The late payments leading up to your account cancellation have a significant impact on your credit rating, as your payment history accounts for 30 percent of your FICO score. The charge-off itself has an additional negative impact.
Features
Although the exact FICO scoring formula remains a closely-guarded trade secret, a high debt utilization ratio damages your credit rating. Your debt utilization ratio is the amount of money you owe on your credit accounts measured against your available credit limit. When a credit card company closes your account, your available credit limit disappears while your balance does not. This lowers your total debt utilization ratio and, in turn, lowers your FICO score.
Time Frame
On its website, myFICO.com, Fair Isaac Corp. notes that the length of your credit history accounts for approximately 15 percent of your total FICO score. If your closed credit card account was one of your oldest accounts, its loss shortens the length of your credit history -- adversely affecting your credit score.
Considerations
The fact that the account was closed by your credit card company and not by you will be noted on your credit report. Although this fact does not directly impact your FICO score, it can impact whether or not a lender chooses to provide you with new credit. Any lender that pulls a copy of your credit report can see that a previous credit provider closed your account. This is a red flag to many lenders, as it indicates that you neglected to adhere to the terms of a previous credit agreement.
Prevention/Solution
Some credit card companies will agree to reopen your closed account if you can submit immediate payment or your credit report demonstrates that you have practiced responsible debt management in the time since the company closed your account. If you successfully negotiate with the credit card company to reinstate your original account rather than allowing you to open a new one, doing so will mitigate some of the damage to your credit rating.
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