Your credit score influences many aspects of your financial life. A suboptimal credit score increases your interest rates, insurance premiums and the chance of applications being denied entirely. As your credit report ages, accounts both good and bad fall off your credit report. Losing an account with good history could drop your score, while losing negative accounts increases your credit score.
Your Credit Score
You must understand how your credit score is calculated before you can gauge the effect of losing a trade line. Your credit score is generated based on several key factors including payment history, balances, negative accounts, age of accounts and inquiries on your credit account. Optimal credit reports contain only positive trade lines. These accounts show positive payment history for at least two years -- new accounts can lower your credit score in the beginning. In addition to positive accounts, you want minimal credit inquiries and no negative information like late payments.
Positive Trade Lines
Positive trade lines are the heart of your credit report. According to Experian, positive trade lines stay on your credit report for a period of ten years after the date of last activity. As long as you continue to use the account, it could stay indefinitely, adding to your positive credit history. If an account full of good payment history drops off, though, your credit history appears shorter, which in turn lowers your credit score. Any negative information is also weighted more heavily if positive information drops off.
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Adverse accounts are accounts on which you defaulted or made late payments. Even one 30-day late payment indicator changes the account into an adverse account, which affects your credit score. Collection entries, judgments and bankruptcies all significantly lower your credit score. Late payments stay on your credit report for up to seven years. Collection entries and judgments remain for seven years from the date it became past-due. Bankruptcies stay for seven to ten years. Losing an adverse account causes your credit score to increase.
Statute of Limitations
An account's appearance on your credit report does not indicate whether or not you owe the debt. Even if the account ages off your report, the collection agency or creditor may still continue to collect on the debt until your state's statute of limitations runs out. Each state has its own time frame for collecting debts. Once that time frame passes, the creditor can no longer take you to court to collect on the debt, although it may continue to try to make you pay voluntarily.
In some limited instances, a negative debt could appear on your credit report twice -- doing double damage in the process! When you default on a credit account, the account generates negative payment history and an eventual charge off status, significantly hitting your credit score. When the creditor sends the account to a collection agency, the new collection entry also lowers your score. When both these entries drop off, a significant increase often occurs.
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