Good credit can be your ticket to low interest rates and speedy loan approvals. The decisions you make concerning your credit accounts can have consequences that last for years. "Account closed by consumer" means that you, not the lender, closed the account. Under certain circumstances, how you handle the closing of this account can hurt your credit.
The actual wording on a credit report of "account closed by consumer" does not negatively impact a credit report, but an unpaid balance on the account is one reason for causing a blemish on your report.
Reasons for Account Closures
An account can be closed for various reasons. Some lenders close credit card accounts for lack of use, and others close them because the account was mishandled by the borrower. You can also decide to close your account on your own.
The credit bureau sometimes notates on a credit report whether the account was closed by the consumer or lender. The appearance of "account closed by consumer" on a credit report is not considered a negative item on the report.
Credit Scores Unaffected by Comments
The notation "account closed by consumer" isn't factored into a credit score and has no impact on it. Your credit score is computed according to the Fair Isaac Corp.'s formula. This FICO credit score does not factor in comments made by you or your lenders on the report.
Your score determined by how well you pay your bills and by how much debt you have. It also weighs how long you've had credit, how much new credit has been applied for lately, and the different mix of credit types (such as loan, credit card, mortgage) on the report.
Unpaid Balances Impact Credit Scores
Although "account closed by consumer" isn't a negative notation on your report, the act of closing the account could harm your credit. As part of calculating your score, the FICO formula looks at the amount of debt you have versus the amount of your available credit; this relationship often is referred to as your utilization ratio. Lenders want to see more available credit and less of a balance. This raises your score.
If you close an account with a balance remaining, you still have the same amount of debt but you've decreased the amount of your available credit. This increases your utilization ratio and could lower your credit score.
A Manual Review Digs Deeper
If a lender closes the account, the account might have a notation that reads "account closed by lender." Whether the account is closed by the lender or the consumer has no bearing on a credit score. However, if you apply for credit at a later time, a lender might not only look at your credit score, but also might review your account manually. This means the lender reviews the history of the accounts on your report.
Some lenders might view "account closed by lender" as a negative, especially if the account shows a history of late payments or still has an unpaid balance.