What Would Damage a Credit Score?

You might think paying debt is a good thing that should boost your credit score, but a quirk in the FICO credit scoring model could penalize you for this move. This just goes to show that you never know what might hurt a score. Most of the time, however, commonsense actions do the brunt of any damage, such as missing a payment.

Considerations

Sometimes, not even the national credit bureaus themselves can predict the effect of an item on a credit report. Thus, they usually call items that tend to have a negative effect "potentially negative." This is typically limited to missing payments, delinquent accounts -- charge-offs or a collection account -- public judgments, bankruptcy, foreclosure or any kind of debt settlement, such as a short sale on a home.

When Paying Debts Hurts Your Score

The FICO scoring system likes to see borrowers have multiple revolving and installment accounts, so if you pay off a mortgage, and this was your only installment loan, you could see your score drop from having a reduction in credit diversity. You can also see random drops due to moving into another demographic. Once a bankruptcy leaves your report, for example, you could see your score drop because you are no longer compared to just people with a bankruptcy on file.

Credit Utilization

The FICO model usually dings you for having debt on a revolving credit line and how much of your credit limit you use across all accounts and on each card -- credit utilization. If, for instance, you have $1,000 in credit card debt, it looks better to have $250 on four cards with a limit of $1,000 on each than maxing out a single card. You want to keep credit utilization below 30 percent across all accounts and ideally below 10 percent.

Tip

Every negative item has a credit reporting limit, except for unpaid tax liens, which can remain indefinitely. Thus, most items are only temporary, but since negative incidents become less important each year, they do less damage as time goes on. Send in payments on time and eliminate debt whenever possible and you should see your score improve within months.