Many people are under a great misconception regarding their credit cards and credit score. They think that paying off their credit cards will lower their credit score. That is totally wrong. Your FICO, Fair Isaacs Corporation., score is calculated from a lot of different credit data in your credit report. The following percentages reflect how important each of the categories is in determining your score: Payment history 35%, Amounts owed 30%, Credit history length 15%, New credit 10%, and Credit types used 10%. These percentages are based on the importance of the five categories for the general population. [Note: For people who have not been using credit long, the importance of these categories may be somewhat different.]
If you have two credit cards and on each of them you have a $5,000 credit limit, your total available credit is $10,000. If you have charged $3,500, your amount owed percentage is calculated by dividing 3,500/10.000. Therefore , the amount you owe percentage is 35%. If you were to payoff the $3,500, you would not have an amount owed percentage and it would not be accounted for in your FICO score. However, let’s say you decided to close one of the cards. You have essentially cut your amount of credit in half. If you owed the $3,500, then your amount owed percentage is calculated by dividing 3,500/5,000. Now, the amount owed percentage is 70%. This would lower your FICO score because the amount you owed percentage is very high compared to your credit limit. Paying off the credit card balance does not lower your FICO score. Remember that the Amounts Owed Percentage carries the second highest weight percentage when your FICO score is calculated.
