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The Illusive Credit Score Formula
Most of us have probably asked ourselves, at one point or another, just what exactly are they using to come up with that all important 3 digit credit score? The exact percentages actually change slightly for each individual, but this graph shows the basic layout of how credit scores are formulated.
Now that we know that what goes into your credit score, let’s look at how using the balance transfer method will affect that score.
Payment History - This is a positive category for us, making all of those payments on time will really improve your payment history, and the fact that it is more than a third of your score doesn’t hurt either.
Amounts Owed - This seems like it would be a negative category, but balances at zero percent do not go against your score. Much like unsubsidized student loans won’t count against you. If you keep your utilization in check, (look at FAQ for more info) this should also be a positive category.
Length of Credit History - Obviously there has to be a downside somewhere, and this is the main one, luckily it’s a much smaller slice of the pie. Opening up new cards will bring down your average length of account. This is the area that will originally drag that score down a couple points.
New Credit - Having new credit could be good or bad. All of the credit inquiries from the card issuers will hurt you in this category, but maintaining a positive credit history with the new credit should bring it back up. Therefore, I count this area as a push.
Types of Credit Used - Using credit cards would usually not be the best addition to this category, but the fact that it is at zero percent means it should not go against the score.
As I mention on the site, in the beginning, your score will usually fall anywhere from 10-30 points, but as you can see, after having the accounts open for a while and making your payments on time, not only will your score rebound, it should actually improve. I hope to put this up in the “Credit Basics” portion of the site once I polish it up.
Thanks to myfico.com for the graph and information on the subject.
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