If you’ve ever turned to the Internet for the answer to a question about credit scoring, you probably ended your search more puzzled than when you began.
There's a lot of misinformation out there. And FICO, the company responsible for the most often used scoring model, only reveals limited information about how the sausage is made—which doesn't help matters. Plus, since everyone’s credit profile is different, there are often no clear yes or no answers to common questions.
With that in mind, here are three important credit half-truths that you need to understand. After all, the more you know, the higher your score is likely to be.
THE MYTH: Closing a credit card you've had open for a long time will hurt your score because the formula values a long account history.
People often hesitate to close credit cards they’ve had open for years because they think that doing so will shorten the length of their credit history—which FICO admits comprises 15% of one's score. Not so.
“Closing an account with a good payment history does not cause you to lose the history for that account," says Rod Griffin, director of public education at Experian. "Closed accounts with a zero balance that have no negative information in their history remain 10 years from the date they are closed.”
So if you have a long and healthy credit history, you won’t likely see an immediate, sharp drop to your score if you close an old card—at least not for reasons related to length of credit history.
But you might see a dip for credit-utilization reasons. “Losing the available credit limit on that card can increase your overall utilization rate, also called your balance-to-limit ratio, which can hurt credit scores, at least temporarily,” Griffin says.
A full 30% of your credit score is heavily influenced by your credit utilization ratio. Since many people have high limits on their older cards, closing one could drive up your credit utilization ratio—and drive down your score—if you’re carrying balances on other plastic.
This could do serious damage to your score, so the credit limit—not the age of the card—is what's most important to consider before closing an account.
THE MYTH: Your credit score will be fine as long as you pay your balance in full every month
Staying out of credit card debt is important for maintaining a good credit score, so you might be patting yourself on the back for paying off your balance in full every month.
Not so fast. If you’re charging too much at any point in time, there’s a still chance your score could suffer.
As discussed above, 30% of your credit score is heavily affected by your credit utilization ratio. And the FICO scoring model generally penalizes consumers who use more than 30% of the available credit on their cards.
FICO gets the information about what you're charging—and all the information used in your score, in fact—from the three major credit bureaus, Experian, Equifax and TransUnion.
Here’s the rub: Card issuers typically report to the bureaus on a specific day each month, regardless of when your balance is due. This means that if you spend $4,000 on a card with a $10,000 limit, and this balance is reported midway through your billing cycle, your score could get dinged—even if you later pay it off by its due date.
To be on the safe side, keep your credit utilization below 30% on all of your cards, at all times.
THE MYTH: Applying for too many loans in a short span of time will ding your credit score
Unraveling this half-truth depends on how you define “short span of time.” Ten percent of your credit score is determined by new credit inquires, and applying for too much credit too quickly—as in, over the course of a few months—will result in lost points.
But most scoring models count several applications for the same type of loan that occur within a 14- to 45-day window as one hard inquiry instead of many. So if you’re shopping for a mortgage, try to submit your applications within a few days of each other. This is better for your score than stretching the process out over several months.