Closed credit accounts may be forgotten by their former owners once the bill is paid in full, but they are not forgotten by the credit bureaus. Credit cards, loans and other account types show up on credit reports for many years. The exact time frame depends on whether they were paid on time or closed under negative circumstances.
Definition
A credit report is a document compiled by the three dominant credit reporting agencies, according to the Federal Reserve Bank of San Francisco. TransUnion, Equifax and Experian all gather demographic and financial records on consumers and sell the information to lenders, insurance companies and others who need to assess risk before doing business with a person or making a hiring decision. Different types of information stay on credit reports for different time frames.
Time Frame
Closed accounts that were paid as agreed stay on a credit report for up to 10 years, according to the Equifax credit bureau. Accounts that were paid late, charged off or sent to a collection agency remain for seven years from the last activity date, which Equifax explains is the day the account first became delinquent.
Types
Closed accounts are not the only credit report entries that may disappear after a set time frame. Equifax explains that court judgments on unpaid credit accounts stay for seven years, whether or not they are ever paid off. Bankruptcies remain for 10 years. Tax liens remain forever unless they are paid. Satisfied tax liens drop off in seven years. California and New York have their own guidelines for reporting periods, so residents of those states will have certain negative items drop off their reports more quickly. Closed accounts in good standing still remain for 10 years.
Benefits
The reporting system is beneficial because it erases negative items more quickly than positive ones. The negative accounts lose their influence when they drop off a credit report. The good items are helpful, although they loose their impact over time because creditors look most closely at recent transactions. Delinquencies and other negative items within the past year or two offset good records several years in the past.
Considerations
Closing accounts can hurt a credit score because FICO looks favorably on long-term credit. Consumer radio show host Clark Howard recommends keeping credit cards open and using them only twice a year instead of closing them and letting them eventually get erased from credit reports. Buy something small and pay it off within a month or two so the reports reflect current positive activity.
The Federal Trade Commission advises consumers to consider other avenues before filing bankruptcy because it stays on credit reports for so long. People who create tight budgets and get their accounts back on track have clean records within seven years, while bankruptcies haunt them for a decade.
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