Hello, I have done quite a bit of research on this topic, but the more I read the more varied the answers appear to be to what would seem to be a simple question.
If I close a card with a balance, and the credit issuer continues to report the balance and credit limit, will both be factored into my utilization?
As an example, if I have a total of $4,000 in credit across all my accounts before any account closures and I am utilizing 25% of that on one card with a credit limit of $2,000 and a balance of $1,000 (50% individual utilization). After the account is closed are the models assuming A or B:
A: Credit limits of $4,000 with $1,000 outstanding balance - 25% overall utilization
B: Credit limits of $2,000 with $1,000 outstanding balance - 50% utilization
I am interested in clarification on the algorithms in the calculations, not philosophies/perspectives around closing accounts versus leaving them open. I am very familiar with the considerations in that regard.
Those accounts are considered maxed out and will drag your score down until the balance is paid off.
Since they are closed, your credit limit is in effect $0.00 on those accounts.
There are two lines of opinion that are routinely posted here in the forum.
The first line of opinion is that closed accounts that are reporting a credit limit and a current balance are included in your % util scoring of revolving credit the same as an open account, i.e., the balance divided by the credit limit.
A second line of opinion asserts that if closed or charged-off, the account is scored as 100% util.
I have seen statements by Fair Isaac that support the first line of opinion, but have never seen any official posting by Fair Isaac or any other official source that confirms the second line of opinion.
I thus subscribe to the first line of opinion until provided some official confirmation that the scoring algorithm somehow treats closed or seriously derogatory accounts via a different math ratio.
Thank you. The line of reasoning that supports calculating utilization based on the final credit limit prior to close makes sense to me, but it is fascinating to me that with all that is known items that seem fairly common such as this are still a mystery.
Credit scoring algorithms are protected by their developers as trade secrets, which require that details remain proprietary, and are not disclosed publicly. They normally decide to forgo patent protection, which has a limited and fixed period of protection, in favor of attempting to retain their invention a secret, and using trade secret law to keep protection for an indefinate period.
The developer loses any trade secret protection of their algorithm once it becomes public domain information, and thus details are often not known.
Many of the inner workings of scoring algorithms become "known" only by anecdotal experiences posted by consumers, or by legitimate reverse engineering attempts. Developers thwart reverse engineering attempts by witholding details.
You thus see a lot of speculation regarding innards of the algorithms.