A closed credit card account isn’t always due to failure to pay or other credit problems; lenders often will close accounts that sit unused and fall into inactive status. Such closures don’t reflect credit problems on your part or create a black mark on your record, but closed accounts can still take their toll on your credit score. Accounts that are closed because you didn’t pay cannot normally be converted from negative to positive.
Closing Inactive Accounts
Many lenders have a policy of closing inactive credit card accounts, even those in good standing. Although this doesn’t create a negative mark on your credit report, it can still hurt your credit score because a closed account means you lose some of your previously available credit. This has the effect of increasing the amount of money you owe compared with your available credit, causing your credit score to drop. How much it hurts you depends on how much other credit you have, how long you’ve had credit and what your credit score is to start with.
Closing Unpaid Accounts
If you have credit card accounts that you’ve failed to make the payments on, the lender is going to close your account. This action is typically coupled with a series of negative marks on your credit report indicating that the account is past due. Every month it doesn’t get paid the credit card company can add another black mark to your file. As long as the account is not paid, it will continue to show on your credit report as a negative account until it finally drops off after seven years.
Negotiating a Settlement
When an account is past due and is closed by the credit card company, the creditor will try to recover the unpaid funds. At this point it’s not uncommon for them to offer you the chance to settle the debt for less than the face value, with the company forgiving the balance. Although this can seem like an attractive option, it isn’t going to give you a clean slate. Typically, the debt is reported as settled for less than the amount due and remains on your credit record for seven years. You may also owe taxes on anything that’s forgiven.
Removing the Negatives
In rare cases, a credit card company may agree to mark your account as paid as agreed, even if you settled for less than the amount due. It’s more likely that you can negotiate with the credit card company to remove the debt and their name completely from your record once you have paid the agreed-upon amount. Not all companies consider this practice ethical, so many won’t do it, but it can be worth a try and will give your credit report a positive boost by eliminating a significant negative item.
- My FICO: How to Repair Your Credit and Improve Your FICO Credit Score
- Bankrate: Closing Inactive Accounts
- Clark Howard: Cycling Your Unused Credit Cards Back Into the Mix
- The Washington Post: Credit Card Firms More Willing to Negotiate With Customers
- MSN Money: 5 Ways to Kill Your Credit Scores
- Kiplinger: If I Negotiate a Payoff will it Hurt My Score?
- Bankrate: When does Old Debt Fall Off Credit Report?
- Bills.com: Should you Do a Pay for Delete?