How Much Will My Credit Drop if I Close Accounts After Paying Them Off?

There's no telling for sure how much your credit will drop if you close accounts that you have paid off. Every person's credit score is determined by a number of variables including payment history, length of credit history, amounts owed, new credit and types of credit. Closing an account may affect one or more of these variables negatively and cause your credit score to go down, but it may also be in your best interest to close accounts if the fees are too high or if you won't be shopping for a loan soon.

Payment History

You may be hesitant to close an account because you fear losing your payment history; however, even after you pay off a credit card and close the account, your payment history may still be available on your file for at least 10 years. Whether open or closed, an account will be a factor in determining your credit score as long as it remains on your credit report.

Amounts Owed

The second biggest hike to your credit score comes from paying down account balances. Approximately 30 percent of your credit score is calculated based on the amount you owe on your credit cards and the total amount of credit you have available. If you have just paid off some credit cards, you will have decreased the ratio of amounts owed to available credit, and thus increased your credit score. Closing accounts with no balances will most likely negatively affect your credit score.

Length of Credit History

Your length of credit history accounts for approximately 15 percent of your credit score. If you close accounts that you have had for a long time your score may go down. Your score is also likely to go down if you opened a lot of new accounts recently but decide to close some of your older accounts.

Type of Credit

A portion of your credit score comes from your having different types of credit, and if you eliminate one form of credit from the mix your score may go down. If you have a choice between closing a bank or department store card, choose the department store card. Your credit score will suffer less if you close a department store card than if you close a bank card unless your department store card has the longest history and you only acquired your other cards recently.

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Can a Creditor Report to Credit Bureaus More Than Once a Month?

While people sometimes believe credit reporting agencies wield the power in the credit scoring industry, the agencies are dependent on creditors to provide information about their accounts. Lenders can send new data to the bureaus at their leisure, although most of them send in batches of information at regular intervals.

Identification

Theoretically, a lender can report to the credit bureaus as many times as he wants during the month. In reality, this is not practical or useful, because the lender is unlikely to have new information to report. Most creditors give a borrower 30 days to pay his monthly installment or bill, so they tend to report to the creditor bureaus every month or so.

Considerations

Even if your lender does update accounts multiple times a month, this does not mean your credit report will reflect that new data as the month goes on. The credit bureaus try to keep their files as current as possible, but technical limitations usually result in accounts being updated every 90 days -- 30 days at the soonest -- according to the Bills website.

Forcing an Update

The only way to get an account updated and listed on your report in the same month is to use a rapid re-scoring service. This service, however, only works when you have a false negative item you need corrected. Also, only lenders, such as mortgage providers and banks, can access a re-scoring service. This costs between $25 and $50 per item, but can save you hundreds if you need to apply for a loan soon.

Tip

If you have new information to report, you can ask your lender to update your account with the credit bureaus, suggests the Bankrate website. Some lenders may simply forget to contact the credit bureaus. Alternatively, you can present receipts of payment to new lenders if the data does not show up on your report. The lender must consider receipts and canceled checks under Section 202.6 (b)(6) of the Equal Credit Opportunity Act.

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Credit Score Explanations

A credit score is based on a statistical profile that determines, in theory, how likely you, as a borrower, are to default on a loan. The higher the score, the less risk that you pose to the lender. Credit scoring was first developed by the Fair Isaac Corp., who created the proprietary formula used to calculate the risk-based credit score.

Reasons for a Credit Score

Credit scores are useful to a lender because the score provides a standard by which it can quickly evaluate a borrower. Credit scores only consider information in your credit report, and do not take into account other information that is not relevant to your creditworthiness. One type of credit score is called the FICO score, named after the creator of the scoring model. Former E-loan president Joe Kennedy said, "The FICO score is the single best summary score of one's creditworthiness."

Credit Score Factors

Your credit score is designed to take into account all of your credit report information, but it gives more weight to some information when calculating the score. Past payment history is one of the most important factors in the score, with how you use credit being close behind. If you carry balances on your cards that are more than 30 percent of your available credit, your score will suffer because that is considered poor use. The age of your credit file and how often you apply for new credit, as well as the types of credit you carry are also considered in your score.

What Is a Good Score?

Each individual lender will have different ideas about what is an acceptable credit score based on their own underwriting requirements and the interest rates on the loan, with higher-risk customers paying a higher interest rate. Generally speaking, a score of 750 to the maximum 850 is considered to be a prime score, and should qualify you for the best interest rates. Scores below 660 are considered subprime, and generally do not qualify for the best loan rates and terms. Score requirements may also vary depending on the type of credit that you are applying for.

Benefits in Knowing Your Score

In the past, the FICO score was kept secret from consumers, much like the formula used to calculate the score still is not published. In the early 2000s, companies began to release credit scores to people, even allowing them to purchase subscriptions that monitored their credit score for changes. When you are aware of your score, and the information that determines it, you can make financial decisions that will improve your score over time.

Credit Score Problems

Your credit score does not take into account many factors that contribute to your overall financial health. Net worth is an important indicator of how well you are doing financially, but is not a factor in the FICO score. Income, as well as debt to income ratio are also not considered. Many consumers are overly concerned with their FICO score as a measure of their financial success, and make financial decisions based solely on that score, rather than taking into account other factors that may be more important.

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Define Credit Rating

A credit rating, or score, is what lenders examine to determine creditworthiness. The score largely determines whether a creditor will extend credit or lend a person money. Credit scores influence interest rates and overall terms of credit and loans. Some employers check credit scores of prospective employees. Landlords frequently run credit checks on possible tenants.

Reporting Agencies

A credit score is sometimes known as a FICO score. FICO is an acronym for the Fair Isaac Credit Organization, a pioneer in the credit-reporting field dating to the 1950s. FICO is the most-used model in computing credit scores. Three credit-reporting agencies gather data about credit practices: Equifax, Experian and TransUnion. Credit score calculations are not an exact science, which accounts for discrepancies in the agencies tabulations.

Credit Utilization

Factors such as the ratio of available credit versus the amount of credit expended help determine a credit score. This key ratio comprises about one-third of the score.

Magnitude and History

The extent and duration of available lines of credit, along with their specific nature--credit cards, mortgage, auto loan, for example--account for another one-third of a credit score. A lengthy track record of prudently managing credit increases a credit score.

Payment Record

The final one-third of the credit score calculation considers payment delinquencies: late and missed payments. Other matters that affect scores include numbers of credit checks, which often indicate applications for more credit, and frequent changes of address.

FICO Range

FICO scores range from 300 to 900. The higher the score, the more likely a person will get favorable credit terms. A credit rating of 650 or better is considered good. Credit scores below 500 are deemed very high risk for lenders. If a FICO score is in this lower stratum, a person may still qualify for certain forms of credit, such as a credit card, but the terms and interest rates will reflect the higher risk.

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Can an Annual Credit Report Be Disputed?

A credit report provides a snapshot of your life -- where you live, how you spend your money and how you pay your bills. The challenge for you is that everyone, from landlords to potential employers, may access your credit report for a peek at your life. There's no need to panic if your find mistakes and misrepresentations on your report. There is a process in place to help you dispute those errors.

Federal Fair Credit Reporting Act

The Federal Fair Credit Reporting Act was designed to protect you from inaccurate information on your credit report. Because of this act, independent credit reporting companies have no right to retain that information once they've been informed. An amendment to the act says each of the three nationwide consumer credit reporting agencies --- Equifax, Experian and TransUnion --- must provide you with a free copy of your credit report, at your request, every 12 months.

Examine Your Report

Examine your credit report from the three major credit bureaus carefully. Circle any information that is inaccurate, such as credit that never belonged to you. Also circle incomplete information. This may include a creditor that failed to report a debt as paid in full. Even if there is information included on your credit report that you're simply not sure of, demand the credit bureau verifies it. If it is unable to, it must delete it from your report.

Inaccurate Information

You may find that the information on each credit report is different and that there are different mistakes on each report. You should write a letter to any agency with an inaccurate report. Send the letter by certified mail with a return receipt requested. The receipt will be returned to you, giving you proof of when the agency received your letter. Make a copy of the credit report and letter for your records.

Letter

Your letter should include the date, your name and address. Send it to the complaint department of the credit bureau. State your case simply. Tell them that you are writing to dispute information. List which pieces of information you are disputing and why you disagree with each item. Enclose copies of any supporting documents, such as court documents and cancelled checks. Ask them to look into the matter and to either correct or delete each item as soon as possible.

Investigation

The credit reporting agency must verify the accuracy of each disputed item within 30 days and provide you a written notice of its findings within five days after the completion of its investigation. If credit agencies do not remove inaccurate information, you may need to consult with an attorney.

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Does Having Your Name on a Mortgage Deed Affect Your Credit?

Owning a home has no affect on your credit. Financing a home, however, does have a significant impact on your credit. Just because your name is on the deed to the home does not mean the credit bureaus will even know about it, because they do not check public records for home ownership. It is possible to have your name on the deed of a home with a mortgage and not be on the mortgage note.

Deed vs. Note

A deed is simply a document filed with the county, which tells the county who owns the property. When the county assesses the property taxes, they will send the property tax bill to the people listed on the deed. When the owners or the purchasers of a home obtain a mortgage, the mortgage company requires the homeowners to sign a promissory note. Mortgage companies often record these notes with the county so that they may foreclose on the home if the homeowners stop making the required mortgage payments.

Credit Reports

Credit reports do not actively look for information other than from public records showing liens, judgments, bankruptcy and foreclosure. Creditors, including mortgage companies, contact the three different credit bureaus and report the payment history of their loans. Creditors are not required to contact the credit bureaus. It may choose to contact only one, two or all three of the credit bureaus. The credit reporting agencies then compile this information onto a single document called a credit report.

Credit Bureaus

The three major credit bureaus are Experian, Equifax and Transunion. These three credit bureaus provide the majority of credit information in the United States. These credit reports may be accessed by several different companies, and not always just because you apply for a loan. Some companies pull credit reports on potential employees and even some insurance companies use credit information when determining insurance premium rates. The credit bureaus charge companies who want to access the person's credit report.

Credit Laws

There are laws that protect consumers from wrongfully reported credit items. These laws allow every person in the United States to obtain a free copy of their credit report each year. Annualcreditreport.com is the government-mandated web site where you may request a free copy of your credit reports online. If you find their items that are miss reported, Federal law provides you may request in writing removal of the wrong information. The credit bureaus that have 30-days to prove the information is accurate or remove it from your credit report.

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How to Get the Credit Bureau to Delete Information

Credit reporting bureaus make it their business to sell your credit history to companies you do business with. Sometimes the information the bureaus report is outdated or incorrect. If you have discovered that there is incorrect information on your credit report, the Fair Credit Reporting Act states that you have a right to dispute this information and have it removed.

Instructions

1

Visit annualcreditreport.com to request a free copy of your credit report from each of the three major reporting bureaus: Experian, TransUnion and Equifax.

2

Review your reports for outdated or incorrect information. Circle those items, and make several copies of the incorrect reports.

3

Write a letter of dispute to each bureau reporting the disputed information, explaining what items you are challenging and why. The letter also should state the outcome you would like see take place. For example, do you want the information completely removed from your report, or does the information just need to be corrected? You also have the option of submitting your dispute online via the bureau's online dispute form, or you may telephone the bureau directly: Equifax (800)685-1111, Experian (888)397-3742, TransUnion (800)888-4213.

4

Attach a copy of your credit report to each letter of dispute. This should not be your original report, which should be kept for your own records.

5

Attach copies of documents that support your dispute. For example, you can send copies of receipts or court documents showing payments that have been made to the account in question.

6

Give the credit reporting bureau 30 days to investigate the items you are disputing. The bureau will contact the creditor that reported the information to verify whether your dispute is legitimate. If the bureau has not completed its investigation within 30 days, by law, it is obligated to delete the information from your report. If your dispute is determined to be invalid, you can request that the bureau place a copy of your dispute on your credit report so that those requesting your report will see that you have disputed the matter.

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