Can Your Dance Moves Affect Your Credit Score?

The history of the credit score is as wild and crazy as other American historical milestones. Yet few events in history have had the ability to affect how much you pay in interest charges on your mortgage.

Join SAFE Cents host Mark, as he shares the top five factors credit-reporting agencies use to determine your individual credit score. He’ll settle the issue once and for all on whether how well you can dance has any impact on how well you can borrow money.

What Impacts Your Credit Score: A Video Summary

Today’s episode is about credit scores — those three-digit numbers that determine how likely someone will lend you money.

Ever wonder why your credit score is what it is? What do they base it on, your dancing ability? No, but they used to. Sort of. 

See, in the 1800s when credit was first invented they used a lot of unfair criteria to judge your credit worthiness. 

Eventually, they replaced it with a much fairer rating system that’s not based on your race, salary, or even your dance moves but solely on your borrowing actions. 

Five actions, to be exact. 

The first factor is your payment history, meaning how well you’ve paid the money you owe on time. It’s the most important factor in a credit score.

Number two is the amount of money you owe. Maxing out your credit cards is not a good sign to lenders. 

Next is the length of your credit history. Typically, the longer you’ve had credit, the better. 

Then there’s your credit mix. Having different types of credit works in your favor. 

Finally, they look at any new credit requests. Too many in a short amount of time is a red flag.

So, there you have it: the five factors used to calculate your credit score. And none of them have anything to do with your dance moves. So, just keep on doing that. Like nobody’s watching.

For more ways to keep your money safe and healthy, visit our Learning Center.

How to Improve Your Credit Score

Credit scores dictate so much about our lives: what we can be approved to buy, how good our interest rates are, how much we’ll pay over the life of a loan. Knowing what goes into a credit score is key to knowing how to improve your credit score.

When Did Credit Scores Start?

Since lending was first introduced, lenders have tried to determine how likely someone was to be able to pay them back. Attempts to standardize the criteria started in the 1840s but credit scores as we know them today weren't introduced until 1989. That's right - credit scores are millennials!

Prior to the introduction of the credit scores we use now, the methods for determining credit could be incredibly problematic, based on the borrower's race, gender, gut feeling, or even their dance moves. The standardized program we have now bases creditworthiness on how you've used credit in the past:

• payment history: Do you make your payments on time?
• debt utilization ratio: How much do you currently owe, and how much are you approved to borrow?
• credit history: How long is your track record of having credit?
• new credit requests: Are you taking on too much debt all at once?
• credit mix: Do you have a lot of high-dollar loans, or a lot of credit cards? 

Why Do Credit Scores Fluctuate?

It’s happened to all of us checking our credit scores: You’ve done nothing, but suddenly your score has dropped a few points. Why?

The most likely reason is that your debt utilization ratio has gone up. If you use credit cards regularly and charge a little more one month than you normally do, that could unbalance you. If you see your score go up, though, that may be because your debt utilization ratio has gone down, a late payment dropped off your report, or your credit history has hit a beneficial threshold.

That said, if your credit score has dropped by more than a few points, you should check your credit report and make sure everything is as it should be – no inquiries you weren’t expecting, all the bills you’ve paid are showing as paid, etc.

How Can I Get a Better Credit Score?

Now that you've got the history, let's get down to your real question: How can I get a better credit score?
First and foremost, you'll need to look at your current credit reports. All three major credit reporting bureaus are legally required to provide you with your credit report for free once a year, but these don't show your actual score, just the information being used to determine the score.

If you're a SAFE member, you can see your FICO score once you log into your account. It'll also show you what factors are having the biggest impact on your score so you know where to focus.

Now for the bad news: While there are plenty of organizations promising quick credit rebounds – and there are certainly ways you can improve your score quickly - real, lasting score increases take time. Let’s look at how you can improve each portion of your credit score.

Payment History — 35% of Your Score.

Payment History is the biggest chunk of your credit score, but it's also the hardest to rectify past mistakes. The more payments you make on time, the higher your score. Unfortunately, if your credit report shows late payments, there's not much you can do to remove them other than wait for them to drop off after 7 years. If you just have a few late payments, you may be able to contact the lender(s) and ask them to remove that from your report, but that's entirely at their discretion. Really the best way to move forward is to commit fully to paying everything on time.

Debt — 30% of Your Score.

Credit reporting bureaus recommend you keep your credit usage under 30%. So if you have a car loan for $5,000 and a credit card with a $5,000 limit, you should owe less than $3,000 total.

That inherently means that when you first open an installment loan (mortgage, car loan, personal loan, etc.), your credit score could go down. On the other hand, if you get approved for a credit card with a $10,000 limit and keep your usage low, your credit score may go up!

That also means you shouldn't necessarily close credit cards you're not actively using. Those report to the bureaus as $0 in debt but whatever your limit is in available credit. It also means that when you pay off your car loan or your mortgage, your credit may dip a bit because it’s no longer showing a low usage on a high loan amount.

Credit History — 15% of Your Score.

This is another reason why you may not want to close those old credit cards. Credit History looks at how old your oldest account is and what your average account age is. This is another one that you really can't improve other than waiting it out. You could close newer accounts you're not using to improve that average age, but your credit utilization ratio is worth double your credit history, so tread carefully.

New Credit Requests — 10% of Your Score.

Each time someone checks your credit for a loan or credit card (a hard pull or hard request, not a soft one) it creates an inquiry on your report. A lot of inquiries in a short period of time could be a red flag. 

Credit Mix  — 10% of Your Score.

Generally lenders want to see a mix of different types of credit because they want to ensure you're able to handle all of them. That means installment loans, credit cards, bills that report to credit bureaus, etc. If you don't need an installment loan you should not apply for one, but if your credit report is showing that you don't have enough credit cards, it may be worth applying for one and paying it off every month. Doing this has the added benefit of helping to improve your debt utilization ratio. Keep in mind, it could negatively impact your New Credit Requests and your average age for Credit History, so it's important to weigh all factors.

How Different Types of Loans Impact Your Credit Score

That's a lot of information to take in, so let's look at it another way: How will different types of loans impact your credit score?

Keep this factor in mind when opening any type of loan or credit card: the application will be marked as a new inquiry. That’s not inherently a bad thing, but it could dip your score a few points at first, so you should avoid opening too many new accounts within a short time. We’re also assuming that you have healthy credit habits – specifically that you’re making your payments on time. That’s the biggest factor here.

How Will a Car Loan Impact My Credit Score?

A car loan can raise your credit score pretty quickly. It could give you a solid history of on-time payments and will add an installment loan to your credit mix (though whether that’s a good thing depends on what type of credit you need more of for your mix).

The biggest potential problem with using a car loan to improve your credit score is your utilization ratio. When you first take out your car loan, your lender will be reporting that you are using 100% of that amount, and it could take a few years to get down to a 30% loan usage. The other problem is that when you inevitably pay off the car and close that loan, the lender stops reporting that low utilization and your credit could sink a few points. But! You’ll still have those years of on-time payments which is the most important factor in credit scores.

How Will a Mortgage Impact My Credit Score?

Mortgages impact your credit score in much the same way as your car loan impacts your credit score, but it’ll take a lot longer to get to that 30% utilization ratio.

That said, a mortgage preapproval won’t have much impact on your credit score. This type of credit application is considered a "hard inquiry" and won't likely have a significant impact. 

How Will a Personal Loan Impact My Credit Score?

Again, personal loans will impact your credit score very similarly to your car loan. It has the same positives and negatives, but because you decide how much you’re taking out, getting to a 30% utilization ratio could be a lot easier (or a lot harder).

How Will a Credit Card Impact My Credit Score?

Okay, this isn’t actually a “loan,” but it’s still a valid question. When used wisely, credit cards can be a great tool to improve your credit score, plus they can offer a bunch of perks. If you pay it in full every month, you’re improving both payment history and your debt utilization ratio – that’s almost two-thirds of what credit reporting bureaus consider when determining your score. Of course, there is such a thing as “too much of a good thing,” aka your Credit Mix, so if you already have a lot of credit cards it’ll probably be better to focus on paying off your existing cards and maybe requesting an increased limit.

How you improve your credit score depends on what your individual situation. Keep in mind, almost all issues can be fixed with a little bit of patience and careful money management.