Which is worse for credit score: Bank closure for inactivity, or consumer closure, of a credit card?

Question

Even if a zero-balance credit card is not used, the account age and available credit limit help a person's credit score.

If the person decides they no longer wish to use the card (e.g. due to a rewards program change that makes it no longer the best option for any category), there is some value in leaving the account open.

Suppose a couple years pass and the account has remained inactive; the card issuer notes that they will close the account for inactivity. The customer agrees, knowing they will not want to use the card in the future, and that if something changes that they do, they might wish to be again eligible for introductory bonuses. For the purpose of this question, please assume the consumer has decided to close the account or allow it to be closed for inactivity.

If the customer has another card from the same issuer, sometimes it is possible to call and close one account by consolidating the credit limit into another one; this option is clearly better for the credit score than closure without consolidation because it retains the higher prior total available credit. For the purpose of this question, suppose that is not an option, either because the customer does not have another card from the same issuer or the issuer has a policy against this.

Which of the two bolded options above is worse for the customer's credit score? For this question, suppose there are no fees associated with either option.

Some sources say that having the bank close the account is worse, because the notation of bank-closed does not distinguish as to the reason why. Other sources say that the reason why is distinguished, and it's better to have an account automatically closed for inactivity than to do a consumer closure just prior to when that would happen.

What's the truth? Is there any reliable source (e.g. information from credit ratings agencies) which can provide evidence one way or another, for credit ratings agencies in a particular jurisdiction?

Answer 1

I think the answer could likely vary across scoring models, but in general, I would say neither is worse than the other, because most scoring models don't consider it. From the horse's mouth (dated January 26, 2017):

In the past, a statement that the account was closed by the lender was considered negative. That is no longer the case. People today open and close credit card accounts so often, that who closed the account is no longer a meaningful indicator of risk.

Once a credit line account is closed, as you pointed out it might affect your score, since your utilization percentage will likely go up. But the reason it was closed shouldn't matter.

Answer 2

Both are worse but it also depends on the scoring module.

When you close a credit card account or it gets deactivated, your credit limit for that card gets reduced from your overall credit limit which in turn increases your overall credit utilization ratio. If the overall ratio goes beyond 70%, your credit score might get impacted.

Canceling a credit card can cause your score to drop as it can lower the average age of accounts on your credit report, especially if it's an account that's been open for a long time.

This is because the age of your accounts is factored into your credit score, with longer payment histories bolstering your credit score. If you close an account that's been in good standing for many years, canceling it, and thus lowering the average age of accounts in your report, can ding your credit score.

Answer 3

It is highly doubtful that an account which is inactive would be left open by the bank for "years".

Most banks do a good job at winnowing out accounts with no activity in fairly short order. In many cases this can be as little as six months (with NO activity at all, mind you), while others may allow for longer, but almost certainly not years.

There might be exceptions, such as high net worth clients or clients who conduct other business with the bank, in which case the account might be left open as a courtesy.

It might be worth reading through the account terms and conditions to see if there is a clause on account dormancy.

As to your question about the effect on credit scoring, as long as the account was in good standing at time of closure then whether the bank or client closed it is a distinction without difference.

The more impactful aspect would be the age of the closed account relative to the rest of the accounts in the file. Anything that affects average age of accounts will likely have at least some small measure of effect (maybe barely noticeable) on the credit score. There are other considerations that determine this (number and age of remaining open accounts and so on), but since the mechanics of how the scoring models work (and this is highly dependent on which bureau and which model you're using) are proprietary and therefore kept secret, we can only make extrapolations based on what is observed.