One common misconception about FICO scoring is that you are linearly rewarded or penalized for the amount of credit you have. Some people believe if you have low credit limits and balances, it means you've barely ever used credit, and therefore don't get rated highly. Or, turning that logic a little, if you've never had debt or credit at all, you must be an outstanding risk.
The other side of that coin is that if you have a lot of open credit, you're considered a poor risk because you're liable to charge up all those cards and go broke. Or if you carry huge balances month after month, you show yourself to be a credit "power player," and we all know the credit card companies want you to carry high balances so they can rake in the interest charges, right? Some people also believe that unused cards should be closed "so they don't hurt your score."
These ideas range from oversimplifications to flat-out falsehoods. The truth:
1. FICO scoring will punish, not reward, consumers who max out their cards. This is one of the variables, called utilization, that figures into FICO scoring. FICO scoring will give you a good, hard flogging for maxing your credit cards. If your FICO score is, say, 710, a shopping spree taking you to 95% balances on all your cards can cause your score to plummet into the low 600s. That's a hundred or so points. So there's never a FICO-related reason to carry a high balance. The optimum amount? Less than 10%. The good news here is that high utilization, unlike late payments or defaults, is not recorded for previous months. So if you splurge and lose fifty FICO points, you'll get them back within a month or two once you pay your balances down.
2. To a point, FICO scoring considers having many credit cards to be better than just having one or two. Emphasis on the words, "to a point." Once you pass five or six cards, the benefit of each additional card diminishes, and after ten or so, there's really no point in getting more. However...
3. ...FICO scoring will not punish you for having too many cards. According to FICO scoring, there's no such thing as too many cards. However, mortgage lenders can get a little nervous if they see you have 17 credit cards with total limits of $220,000 or so, fearing you may max them out at some point down the road and be unable to pay your mortgage. So if you have enough plastic in your wallet to deflect small-arms fire, you may be asked to shed some of it before getting a mortgage. But that's got nothing to do with FICO scoring.
4. Closing credit card accounts seldom, if ever, helps your score. If you have lates or other derogatory information on an account (like a Macy's card you were late on for two months back in 2006), closing the account will NOT cause it to fall off your credit report. The account, complete with lates, will remain for up to seven to ten years. And if an account has no lates, there's no way it can hurt you anyway.
With the exception of the utilization (credit used versus credit limits) calculation, FICO scoring is decidedly qualitative rather than quantitative. If you get a collection for $40, it's going to jurt just about the same as a collection for $4000. If you get a revolving charge account, FICO doesn't really care whether it's a $300 credit limit starter card or a $5,000 prime card. To master FICO scoring, you should, with the exception of credit card balances, think in terms of types of credit and credit report entries (positive and negative) rather than dollar amounts or "too much" or "too little" credit. If you have anywhere from four to a zillion credit cards, you're fine FICO-wise, as long as you keep balances under 10%.
