When it comes to figuring out credit scores, there are very few things that are obvious.
Really, I spend a lot of time following this stuff and sometimes I wonder if someone sat down and decided to make it as complex as humanly possible. OK, I know that probably isn't true. But it's easy to feel that way when it comes down to that one number that measures your creditworthiness. Some of the things that ding your FICO score seem downright counterintuitive.
1) Closing a account
Most people think that closing a credit card account will boost their credit score. After all, you're taking away the temptation to go shopping and rack up debt on a card. You should get extra points for that, right?
Well, this is one of those counterintuitive things I mentioned. You have something called a "credit utilization ratio," which is the amount of credit you've used compared to the amount of credit you have available. Your available credit is the total of all of your credit limits.
The lower your utilization ratio, the better your score will be. So when you close a credit card and you lose the amount of available credit associated with that card, this increases your credit utilization ratio. And that can lower your credit score.
2) Having a utilization ratio above 10%
For years, we were all told that a credit utilization ratio no higher than 30% was the gold standard. But guess what? The magic number is actually 10%. I know this sounds crazy, but it's true.
The closer you keep it to 10%, the more it boosts your score. So if your credit limits add up to $5,000, don't carry more than $500 on your credit cards.
3) Opening too many accounts at one time
If you think about it, this one kind of makes sense. If you try to open several credit card accounts and apply for an auto loan all at the same time, it looks like you're suddenly desperate for credit. And people who are desperate for credit often have cash flow problems.
This can hurt you in two ways (at least). First, you might not get approved for the credit cards or for the loan because banks get spooked by anything that reeks of desperation. It makes you look risky.
Second, every time you apply for credit, your score gets hurt a little. Once isn't a big deal, but several "hard inquiries" in a short period of time can lower your score quite a bit.
4) Not having enough variety in your credit profile
You may not believe this, but I purposely got a low-rate auto loan to increase my . I hadn't had an installment loan in 20 years. And no, it's not because I'm rich and pay cash for all of my cars. I buy used cars because I prefer to spend my money on other things.
So I had credit card accounts and a mortgage in my name, but no installment loans. When I first got the loan, I took a credit score hit because I added debt. But a year later, my choice has had the desired result of producing a higher score, and I'm ready to pay off the loan. It sounds corny, but when it comes to your score, variety really is the spice of life.
5) Never using your credit cards
There's a myth that if you don't use your cards it will look like you have perfect credit. But it doesn't work this way. You have to use your cards -- and use them responsibly -- to even get a credit score to register.
Listen, I always recommend paying the balance off each month. So I'm not suggesting you spend big on your cards. If you're only keeping credit cards for an emergency, then just plan on using them once a month on something minor.
For instance, use a card for a recurring monthly payment, such as a gym membership. The scoring formula likes to see that you use your cards regularly and responsibly.
Does that make sense? Well, maybe not totally. But when it comes to your FICO score, the more you understand how it works, the better chance you have of protecting -- and improving -- your score.
Beverly Harzog is a nationally recognized credit card expert, author, and consumer advocate. She blogs about credit cards at BeverlyHarzog.com.