When you or your creditor closes one of your credit accounts, the account doesn’t just disappear—and neither does any remaining balance you haven’t paid off.
If you care about your credit, then it’s important to understand what obligations you have to pay off closed accounts and what will happen if you do (or don’t) pay.
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What are closed accounts on your credit report?
A closed account is a credit account, such as a credit card, that’s been deactivated or otherwise terminated.
A closed account can appear on your credit report in several different ways, depending on the type of credit account it was, why it was closed, and who closed it.
The following remarks are associated with closed accounts on credit reports:
- Account closed with balance
- Account closed due to transfer
- Account closed by consumer
- Account closed by creditor
- Account closed by credit grantor
- Collection account closed
Why do credit accounts get closed?
Credit accounts can be closed for several reasons:
- You closed the account yourself: If you decide that you don’t want to keep an account open (because you’re not using it very much, because it has high fees, or for any other reason), you can tell your creditor you want them to close it. Before they do so, they’ll expect you to pay off your remaining outstanding balance on the account, so accounts closed for this reason usually have no debt associated with them.
- You finished paying off a loan: When you pay off an installment loan, such as a student loan, auto loan, or mortgage, the account will close automatically. As you’d expect, an account like this will also have a zero balance (i.e., no remaining debt) when it’s closed.
- The account was inactive: If you go for a long time without using one of your credit cards (usually at least 6 months to a year), your card issuer may close it automatically. For an account to go unused for that long, it generally also has to have a zero balance.
- Your creditor closed a delinquent account: If you consistently fail to pay off an account on time or otherwise violate the terms of your agreement with your creditor (such as by overspending on a credit card), they may punitively close the account. In this case, you’ll continue to owe whatever balance remained on the account when they closed it.
Am I legally responsible for paying off closed accounts?
Yes, you’re responsible for paying off closed credit accounts that still have outstanding debts (aka accounts that your creditor closed punitively, as described above).
Debt doesn’t disappear just because your credit account was closed. You still owe it to your lender, and if you don’t pay, there may be serious consequences.
What happens if you fail to pay off closed accounts?
Initially, your lender will probably call you or send you letters demanding payment. If you continue to not pay them and they conclude that you probably never will, they’ll charge off your debt. At this point, you’ll see the balance beside your closed account (on your credit report) update to $0.
After that, your creditor will probably sell or transfer your debt to a debt buyer or debt collection agency who will take over collecting it. You’ll then see a new “collection account” appear on your credit report with the balance that was written off your original account.
Next, you’ll begin getting calls from debt collectors asking you to pay up. If you ignore your debt collectors and continue to fail to pay, they may file a lawsuit against you and obtain a court judgment allowing them to garnish your wages. All the while, your debt will continue to accrue interest (meaning it will grow larger) and you’ll be subject to persistent debt collector harassment.
The unfortunate truth is that you have a legal obligation to pay your debt until the statute of limitations has expired. Until that point, debt collectors can pursue payment through various means and make life very difficult for you. The simplest way to protect yourself is to just pay what you owe.
Will paying off a closed account help my credit score?
Paying off a closed account usually won’t directly benefit your credit score. However, as you know, unpaid closed accounts often lead to charge-offs and collection accounts, and those do hurt your score.
This means that paying off a closed account before it’s charged off can protect your score from damage in the future.
What’s more, future lenders will look at your full credit history in addition to your numerical credit score. Having a debt that’s labeled “paid in full” is better than having one that’s marked as unpaid or settled. The latter might be a dealbreaker when you apply for credit in the future, but the former is less likely to be.
Will paying off a closed account after it’s been sent to collections help your score?
If your creditor closed your account due to missed payments and transferred or sold your debt to a debt collector, then paying off your collections may improve your credit score in newer credit scoring models that ignore paid collections, such as FICO 9, VantageScore 3.0, and VantageScore 4.0. However, it won’t improve your score in the older (but still widely used) FICO 8 scoring model.
There’s no surefire way to tell which scoring model your future lenders will use. This means that if you can afford to do so, paying off your collections is worth doing.
Note that in this scenario, you’re not technically making a payment toward the closed account—rather, you’re paying off the new (open) collection account. However, this is a fairly technical distinction; you’re still paying debt that was left over after your account was closed.
Can you remove closed accounts from your credit report by paying them?
No, you can’t delete closed accounts by paying them. It’s sometimes possible to remove a closed account from your credit report, but you’ll need to take special steps to do so.
If the closed account is an error (e.g., it’s actually open or it never belonged to you in the first place), deleting it is relatively simple—all you have to do is dispute the item on your credit report. You’re legally entitled to dispute any and all mistakes on your credit report and have them removed.
On the other hand, if the closed account is legitimate, deleting it will be much harder. You can try negotiating with your creditor using a strategy known as pay for delete or by asking for a goodwill deletion (depending on whether you’ve already paid the debt on the closed account or not). These strategies aren’t guaranteed to work, but there’s no harm in trying.
Why do accounts stay on your report after they’re closed?
Your credit report is a track record of all your previous credit activity. It’s designed to help lenders make more informed decisions when reviewing your loan and credit card applications.
For this reason, it’s important for your credit report to document how you’ve managed your debts in the past, so accounts don’t immediately fall off your report once they’re closed.
Having closed accounts on your credit report isn’t necessarily a bad thing. Accounts that were in good standing will positively contribute to your credit age and boost your credit score as long as they’re on your credit report.
Should you try to remove closed accounts from your credit report?
Again, accounts that were closed in poor standing damage your credit, whereas accounts that were closed in good standing actually benefit it. Removing a closed account is only worth it if your creditor forcibly closed it because you let it become delinquent.
Why you should pay off closed accounts
As you’ve probably gathered, it’s a good idea to pay off closed accounts with active debts if you possibly can. Doing so won’t remove the account from your credit report and it doesn’t have direct or immediate benefits for your credit score, but it can protect your credit from damage further down the line.
More importantly, it just isn’t a very good idea to ignore outstanding debts (with the exception of time-barred debts, which are so old you can’t be sued over them anymore, but debt that’s still associated with a closed account is unlikely to be time-barred).
Even if your creditor gives up on getting you to pay what you owe, they’ll transfer your debt to a debt collector, and their efforts to make you pay up could throw your finances and credit into serious disarray.
If you’d like to pay off a closed account but simply can’t afford to do so, contact your creditor or debt collector. It might come as a surprise, especially if you’ve been getting a series of progressively pushier letters demanding that you pay up, but creditors and collectors generally prefer to handle things amicably. They don’t want to end up in court any more than you do.
If you explain your situation, there’s a solid chance they’ll be willing to work out some kind of payment plan that will make clearing the debt from your closed account more manageable.