How does a "closed account" affect one's credit score?

Ok, so I bought this giant tv at Best Buy. I thought my credit rating my be a bit shaky so, thinking that it would approve my chances, I applied for the Household Credit card (they were the ones doing the approving for Best Buy). With the Best Buy credit card, I now have 4 lines of credit (not counting student loans, of which, I’m down to three - yeah me!). When I saw the terms of the Household credit card, and how onerous they were, I thought to myself that no way in hell would I open this account. It had high interest (higher than anything I’m paying now), $99 annual fee, and some ridiculous penalty for late fees. I was really appalled by the $99 annual fee for nothing. I pay $60 for my airline card, but at least I usually get a free ticket somewhere every year. Household tried to soften the blow by giving a $25 gift certificate for opening the account. So, I cut up the card and ignored it.

Two weeks later, I got this letter asking why I hadn’t opened the account. I laughed at it and threw it out. Yesterday, I get a statement in the mail saying that I owed a minimum of $22 for the $99 annual fee. I called to dispute this, and they said the Customer Service Rep said that it isn’t a problem, and that she’ll close my account. I said, “How can you close an account that I never opened in the first place?” I then told her all that i told you guys above. She told me that I actually did open it when I applied for the Best Buy card. And, i told her no, I just applied for it. When I saw how ludicrous the terms and conditions were, I never activated it. So, how does having a “closed account” (by consumer, I assume) affect my credit rating? I’ve heard how having an inquiry into credit, and not actually opening a line of credit lowers ones credit score. Does this do the same?

The activation is for the card, not the account. You did indeed open an account when you applied and they accepted your application.

Opening excessive lines of credit weakens your credit score, and closing them does not improve it. Given your situation, I’d guess you dinged yourself. Inquiries weaken your score when they are for credit that is denied, not for exploratory inquiries that credit companies do when looking for customers.

I am not a credit professional, but I have done a lot of borrowing

To expand on what the earlier poster said, having more lines of credit is generally bad. (Unless you have zero.)
I would suggest that you consider calling household and try to find a helpful supervisor on this issue.
Barring that, if you have the spare time, I might threaten them with a small claims suit for inaccurate credit reporting. That would let a judge sort out the situation., and might just make the bank back down in the interest of saving time.

I’ve heard it mentioned that having once-opened accounts hurt your score in the way Nametag indicates. What is the reasoning behind this?

The reasoning is that the more credit you have available, the greater the chance that you will go off your nut and use it all. Most people have far more credit available than they ever use, or ever should use. If you go in over your head, the bank will never get its money back, and may never even see any interest.

I’m not sure where the idea that having too many lines of credit affects your score comes from. I run credit every single day, and I’ve never seen anyone’s score go down from having too much credit. If you pay everyone their money on time consistently, you’re going to have good credit, regardless of how many lines you’ve got on your bureau. I’ve seen people with tier 1 scores that have credit reports that range from 1 page long to 5 pages. What will shoot your credit to hell is late payments, no payments, etc. Opening more credit won’t negatively affect you unless you slack on the payments.

In the interest of investigating, I just ran my Equifax. I can’t provide a link, since this is my credit report. But here’s what it tells me about my FICO score:


Credit bureau guy here. I hate reliving this 'inquiry = ding against my credit" confusion.

Here goes in simple form:

Recent inquiries lower your score slightly = true.

Why = Because that inquiry could be a new account. Imagine you are a lender…mmmm…say a refinance company…and you pull a report on a couple who wants a loan…and two days ago they were at a Mercedes dealer and an appliance store, trying to open an account at each.

Well, it’d be bad business to have a scoring model just ignore thos li’l ol’ inquiries. Afterall, they could represent brand new debt (the worst kind) of up to $100,000 dollars…could be 60k…mabe 40k…who knows. But since those potential accounts won’t show up for a few weeks on the credit report with all the terms and balances, they are wild cards…

…and lenders/scoring models aren’t going to ignore them.

So, for a month or so, they have an impact on your score. It keeps you under control, and it is a way for the lenders to be cautious about some serious-ass unknown debt you might have incurred.

After 30 days (depends on model or lender), those inquiries fade into non-factors.

Duplicate inquiries from similar institutions are ignored (you don’t usually get penalized five times for visiting five car dealers.)

And there you have it.

Oh, and credit bureaus - get this - have to give you three reasons your score could be better…and that is a federal law. So, you could be three points from the highest score ever issued, and the feds mandate that the credit bureaus give you the top three reasons your score could be higher

Under what circumstances do they have to tell you the three reasons your score could be better? For example, my quoted text above is the entire reason I was given for not having a “perfect” 850, and it’s a single reason (I read it as a single reason, anyway). But, this was a purchased report; I wan’t denied credit. On the other hand, back in the days when I was routinely denied credit, they never told me how to improve the score (I think their existence was even secret back then).

My complaint from exactly a year ago, though, is their FICO simulator STILL doesn’t let me simulate closing unused credit accounts. Plus their explanation makes it seem that closed accounts still count.

I’m sure each bureau has it’s own interpretation of the laws. But it is frustrating when someone has a very very high score and you are supposed to give three reasons it could be higher.

Again, some bureaus might not worry about it all that much, but the most conservative interpretation of the law means that someone with an 825 still gets three reasons there score wasn’t higher.

If I can ask a related question:

I was looking into buying an iPod. I figured that I might as well go all the way and priced a 40-gig iPod plus some other accessories and thought that I would go ahead and finance it if I liked the terms of the loan. So I went ahead and applied to see what the deal would look like if I took it. I didn’t like the terms of the agreement (23% APR was the main problem I had with it, as I could do it cheaper by charging it to my credit card or of course just saving my money and paying cash) so I rejected it. Can this sort of thing–inquiry into a loan and then rejecting the loan–have any effect on a credit rating?

Related question: Doesn’t it depend on how high your score is? Is it true, for example, that my parents who have over 820 for sure, and if this happened to them, they would experience a bigger ding than I, who is around 700 (I think I’m under)?

So, do you mean to say that the score would then rise to back to what it was?

I was involved in a similar discussion to this one on a “Creditnet” forum I used to frequent. Anecdotal evidence seemed to indicate that the higher your score is and the less inquiries you have, the more damage an inquiry does.
Persons with scores above 750 on that board recounted losing 30 points to one inquiry. Whereas with lower scores, it might be more typical to lose 5 points to an inquiry, and in some case zero.

…what is was before?" -end lawboy.
A: Well, the impact will be gone after the inquiry ages, but you are into a whole other set of things now. The ages of accounts have changed, accounts have been upated, payments have been posted, and the account (if there is one) that was related to that inquiry might be on file. The score is so dynamic, it can’tbe expected to just pop back into place. It’s best to say the impact -whatever that is - is no longer factored in. The inquiry becomes just fyi, not part of the scoring model.

Wodall gave you the other answer. Remember that there are numerous scoring models but only a few popular ones, and what is being discussed is true most of the time.

I’ve seen reports on both sides of the fence. People with huge amounts of credit (and debt) with excellent scores and those with horrible scores with straight R1s and no late payments.

Very interesting factoid Philster. I’ve noticed all the reports I pull include a little note about why the score is “low” even though I see people with 800+ scores.

And that’s another point I wanted to bring up. Having “credit” is not the same as having debt. You can have $100K+ credit space on your credit cards and have an excellent score. It’s the people with too much debt load / poor debt servicing numbers who get poor FICO scores.

My personal score wasn’t so hot when I started working (after I got interested in Credit in general I pulled my own report online). I’ve since brought it up but I can verify that lower-scored people (mid 600s), each hard credit hit took off about 5 points. I’ve seen credit hits (one hit, then another the next day) where people lost 30 points (from the 820s to 790s).

Couple of things:

For the love of Og, just cutting up a card doesn’t close an account. You have to notify the creditor in writing or over the phone to close an account.

Never apply for credit when you don’t know what the terms are beforehand. Read the disclaimers. By law, a creditor has to spell out how much the account is going to cost you. Applying for a card and then deciding not to “open” it after they send it to you is not how the process works. Once a card is sent to you, your account is open. Read the disclaimers. Read the disclaimers. Read the disclaimers!!!