What does a closed account mean on a credit report?

Closed accounts on your credit report means bad or good news to your credit score, depending on whether they’re closed in good standing ($0 balance) or not.

A closed account in “bad standing”
If you stop paying your debts, after a period of time (typically 6 month) the lender usually closes the account for further payments, writes it off and sell it to collection agencies or files a law suit against you.

When this happens, the account status changes to “Closed“. The account balance stays unchanged and reflects your remaining debt balance. The account becomes inactive, and you can no longer make payment to it.

That doesn’t suggest that the debt is erased. While the original creditor is no longer trying to collect it from you, he may sell the debt to collection agencies, in which case the same debt will re-appear as a new collection account and will further damage your already damaged score. The Collection agency or the original creditor may even file a law suit against you.

Either way, a closed account in bad standing is considered a serious delinquency and will have huge impact on your credit score – up to 100 points!

A closed AND charged-off account will remain on your credit report for 7 years and will impact your score whether paid, settled, or unpaid.

A closed account in good standing
When you finish paying off a loan or close a credit card, the account is closed and the balance is set to $0. This is called a closed account in good standing.

Closed accounts in good standing appear on your credit report with a status “Closed” and a $0 Balance.

Closed accounts in good standing remain on your credit report for 10 years. They do not contribute much to your score as open, active accounts, and in some cases they may even have a small negative effect on your credit score because:

• The account’s credit limit no longer contributes toward your total credit limit. That increases your utilization ration and may lower your score.
• If the closed account is your oldest account, your credit file becomes “younger”, affecting (lowering) your score.
• You stop accumulating positive payment history that benefits your score.

More about the effects of closing credit card accounts here.