Many behaviors that could be damaging to your credit are common knowledge, such as missing payments or maxing out a credit card. On the other hand, there are some credit-damaging behaviors that you might not even know about, or even worse, may mistakenly believe to be good ideas.
Canceling old credit cards
If you have unused credit cards and are thinking about closing some of them, be sure you realize that this could actually hurt your credit.
In fact, there are two main ways closing a credit card can hurt your FICO score. First, it lowers your available credit, and therefore increases the percentage of your available credit you're using, if you carry any balances. For example, if you have $500 in credit card debt and two cards with $5,000 in combined credit limits, you're using 10% of your available credit. If you close one card that has a limit of $3,000, your $500 in debt now represents 25% of the $2,000 in credit you have left. This is part of the "amounts owed" category, which makes up 30% of your FICO score.
Second, another 15% of your FICO score comes from a category called "length of credit history," which, among other things, considers the age of your credit accounts. Closing one of your older accounts lowers your average account age, which is generally a negative factor.
To be clear, there are some perfectly valid reasons to cancel a credit card. For example, if you have an old credit card that has a $100 annual fee that you never use, the cost savings may be worth a temporary ding to your credit. The point is that you should expect a mild drop in your credit score after you close the account.
Hard credit pulls you don't expect
It's well-known that applying for credit can lower your score. Specifically, credit inquiries are a part of FICO's "new credit" category, which makes up 10% of your score. Only "hard" inquiries -- that is, those that you initiate when applying for credit -- are considered, and inquiries from the last 12 months can affect your score.
Where you need to be careful is when you're not expecting a hard inquiry. In a recent example, one of The Motley Fool's own employees was told by a salesperson that there would be no hard credit pull when he applied for a credit card issued by a certain retailer. To his surprise, a hard inquiry did show up a few days later, and there wasn't much that could be done about it.
A single inquiry isn't likely to affect your credit by more than a few points, but even a small difference could drop you into a lower credit tier, so it's important to be aware of this.
Paying off all of your balances
I already mentioned that 30% of your FICO score comes from "amounts owed," and that a big part of this category is the percentage of your available credit that you're using. Generally speaking, lower is better, and most experts suggest that you keep this ratio below 30% to avoid harming your score.
It may seem like 0% utilization would be ideal, but this might not be the case. The average American with a FICO score of 800 or higher uses 4% of their available credit, and no more than 10% of any single credit line. A small balance may be better than no balance.
Now, the FICO formula is a closely guarded secret, so it's impossible to say for sure whether a small credit card balance is truly "better" than none at all. And my colleague Sean Williams, also a perfect 850 FICO achiever, has paid off his credit cards in full for more than a decade. However, if you generally carry a small credit card balance and decide to pay it off completely, it's possible that your score can go down.
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