How does a closed account with a balance affect your score?

[nmk94]

Trying to rebuild my credit after some income loss and the incurring of a lot of credit card debt. New to the forum. Thanks in andvance for any insights.

My question:

I have four credit cards. All four have balances. Three cards were closed by the credit card companies. They say that I should continue to make payments until paid off, but that I can't use the cards. Those three come up as "closed" on my credit report but show a balance.

One card is still open.

In this situation, what is the basis for credit utilization? Are all four accounts used in calculating my credit utilization (as if they were open), or is the open account the only one used for that calculation.

I am not using any of the cards, just making payments and trying to get the balances down as soon as possible and also get my FICO score up. Trying to figure out the best way to do that.

Thanks again.

[Anonymous]

Unfortunately they report as maxed out utilization which really tanks your scores. Paying them to $0 will help recover your scores.

Why did they close your accounts?

[Anonymous]

This is how it (typically) works, with perhaps a few rare exceptions:

(1)  The credit limit of the account will be considered $0 since it is closed.

(2)  Because the positive balance on the closed account exceeds its $0 limit, FICO will consider that card completely maxxed out.  This hurts your score given that FICO considers individual (per-card) utilization as one of its factors.

(3)  The balance will also be counted toward your total utilization.  But remember that your credit limit will be considered $0.

All this is why closed accounts with balances (whether they appear as charge-offs or not) can really hurt your score.

[nmk94]

Wow, that is brutal. Worse than I even thought since it is so severe.

So, as an example (to keep the math easy):

Card 1 - $1000 balance. Closed account. So limit of $0.

Card 2 - $1000 balance. Limit of $4000.

Total utilization would be seen as 50%. (Balance of $2000 on $4000 limit.)

Is this correct?

ABCD - When I called all the credit card companies told me was that they do a periodic review and based on that criteria closed the account. I wasn't given specifics. It seems like there was a domino effect. One card closed, resulting in my credit utilization going up fast, which then triggered another closing.

At least, that's what I'm guessing now that I understand how they calculate utilization.

Follow up question: Does the FICO formula look at both individual utilization and total utilization? (That's what I'm inferring based on what I'm reading.)

So in the scenario above:

Card 1 - 100%

Card 2 - 25%

With the Card 1 score seriously impacting the score.

And I have three...

[Anonymous]

Yep any individual card reporting more than 68.9% really hurts your score and maxed out on one card destroys it until you pay it off.

Aggregate utilization over 28.9% also hurts quite a bit.

In addition, only having 1 open credit card hurts your score for having a poor mix of credit. And having balances on more than 1/3 of open accounts hurts, too.

Do you have any installment loans reporting? If not do the Alliant SSL Technique in my signature link. Then pay down balances and practice the AZEO Method in my link. Once balances are paid, try to get 2 secured credit cards so you have a good mix of credit reporting and your scores will recover nicely.

Did you have any late payments reported on your credit profiles?

[Anonymous]

OP, your 50% utilization calculated with your easy math example is correct. FICO scoring does look at both aggregate (total) utilization and individual account utilization, with aggregate being weighed much more heavily. Did you recently miss a payment or have some sort of negative information introduced to your credit report? It's not often that a creditor will close your account based on utilization alone, so long as you are making one-time payments.

[nmk94]

ABCD - I do have installment loans. Mortgage and student loan. However, I'm going over your 11 rules and will apply what I can.

Brutal - I had some bad stuff happen when my income was low. Late payments — and worse, charge offs on other cards. That affected my score which must have triggered the initial closed account.

Good news is I'm making all payments on time now, have some money set aside for emergencies, and not using my CCs at all.

Bad news is I can't pay these balances down fast enough. But based on the info I have from you guys I'm going to rethink how I approach paying off the cards off with an eye towards getting the utilizations down. 

[nmk94]

So I pulled my CR from Experian. Interesting results.

They only have me down for 1 revolving account, a BofA card. The ratio on that is high — 74%. But the other 3 closed accounts with balances on there aren't reporting in the revolving account list. They are of course, listed in the details as a closed account. But in the summary, all they list are the 1 open account.

Also, in the detail, even though the accounts are closed, they're not being shown with a 100% ratio. They are listed at the actual ratio vs. the credit limit when the accounts were closed.

So it looks like they're just calculating my FICO using the BofA account and a ratio of 74%. Not good (I need to get that ratio down) but manageable vs. having 4 accounts with 3 of them reporting 100%.

Does this seem right?

[Anonymous]

No, that's just "fluff" monitoring software.  Just because the monitoring software may be suggesting that your only open card is the only thing impacting your utilization, the information others like ABCD and CGID have provided with above is correct.  Closed accounts with balances are viewed as maxed out and will adversely impact your credit scores.  That's how FICO will treat those accounts until they reach $0 balances.  Fluff software is good at making things that matter seem like they don't, as well as making things that don't matter seem like they do.  Ignore the charts, tables, graphs, etc. that are associated with monitoring software, as this information can be very misleading.

Your aggregate utilization in the eyes of FICO is probably much closer to 100% than it is to 74%... so it's in your best interest to pay off those closed accounts ASAP if you're looking to dramatically improve your score.  You could see a 60-120 point gain from paying off the 3 closed cards, just to give you a ballpark idea of how much they may be adversely impacting your score due to extremely high aggregate utilization.

[Anonymous]

One thing to try to bear in mind is that a credit report (whether Experian, Equifax, or TransUnion) is just a list of the accounts you have, along with fields like date opened, current balance, etc; and a list of any derogs and inquiries you have had.

A credit score (e.g. FICO 8 Classic) is generated by a computer program taking all the info on that report and converting into a single number, typically between 300 and 850. 

The crucial idea is that the scoring algorithm is made by someone other than the bureau, which is just a warehouse for the data on the report.

The fact that you have a report that organizes the data in a certain way does not tell you at all how that credit scoring algorithm is using it.

So... in brief, no.  It's incorrect to assume that the FICO algorithm is ignoring your closed accounts in calculating your CC utilization.  Rather, you should assume that the FICO algorithm views each closed card with a positive balance as a card with an individual utilization of 100%.  Further, as far as total utilization goes, assume that FICO counts those closed cards as having a credit limit of $0 but does include the balances in the final calculation -- as we explained earlier in the discussion thread.

PS.  I encourage you to get access to all three reports.