Your Credit Score’s Secret Weapon? Spoiler, It’s Variety
When opening a credit account, most people don’t think about its overall impact on their credit score. However, the types of credit accounts you have are one of the primary factors that determine credit scores and may be a factor when qualifying for financing. Let’s look at credit mix, what types of accounts it contains, and how you can improve your score by improving your credit mix.
What Is Credit Mix?
Credit mix is the different types of credit accounts you have. It is one of the five factors used to determine credit scores, making up 10% of the calculation.
What does it measure?
Credit mix looks at the different types of credit accounts you currently have open. Credit accounts are typically either an installment account or a revolving account. Some credit reports may break down accounts into four primary account types:
- Installment loans: This type of loan involves making payments (typically with interest) over a set period, like an auto loan.
- Revolving credit accounts: Revolving credit accounts are ones without a definite end date. They typically come with a credit limit against which you borrow and pay back funds each month. Carrying a balance over month to month will result in interest charges.
- Mortgage loans: A mortgage loan is a type of installment loan but is often separated into its own category.
- Open accounts: With an open account, the balance is expected to be paid in full each month, not carried over. Examples include charge cards and monthly utility bills.
How is it measured?
There isn’t a specific calculation or number when determining your credit mix. In the grand scheme things, your credit mix has the lowest impact on your credit score. As mentioned, there are four primary account types. Accounts that are included in your credit mix include:
- Student loans
- Auto loans
- Personal loans
- Mortgage loans
- Home equity line of credit
- Credit cards
- Retail store cards
- Gas station cards
Accounts not included in your credit mix include payday loans and title loans.
Your goal should be to find a healthy mix of credit accounts that won’t overextend you financially and looks good in the eyes of lenders and creditors. A good mix of revolving and installment accounts should help you achieve your goal. If you’re missing an account type, there’s no guarantee adding it will improve your score. Opening a new account could cause your score to drop temporarily because of the hard credit inquiry required.
Why Your Credit Mix Matters
As mentioned above, your credit mix accounts for 10% of your FICO credit score. Its also a determining factor if you are applying for a loan or other credit product.
How does it work?
Credit scoring models, like FICO and VantageScore, consider your credit mix and other factors when determining your credit score. Five factors make up credit scores, each accounting for a specific percentage of a score. The five factors used in FICO credit scoring include:
- Payment history (35%)
- Credit utilization (30%)
- Credit history (15%)
- Credit mix (10%)
- Credit inquiries (10%)
While your credit mix isn’t the most significant factor in credit scoring, it still matters and can play an even more important role if you have a limited credit history.
Who looks at it?
FICO and other credit scoring companies use your credit reports to determine your credit mix and assign you a credit score. Credit card issuers report account information each month to credit bureaus, which then generate credit reports. The three major credit bureaus in the U.S. are Experian, Equifax, and TransUnion. The information in your credit report is what credit scoring companies use to create your credit score.
Lenders and creditors may also look at your credit reports to view your credit mix. Typically, having a diverse credit mix is a positive for borrowers. It shows that you’re able to manage different account types responsibly.
How You Can Improve Your Credit Mix
While credit mix probably doesn’t deserve as much attention as more critical credit score factors, it’s still something to consider, especially if you don’t have a very good mix of accounts. Here are a few steps you can take to improve your credit mix.
Get familiar with your credit mix: To understand your credit mix better, obtain a copy of your credit report from the three main credit bureaus. All three credit reports are available for free through AnnualCreditReport.com. Review the section on open credit accounts to determine your credit mix.
Apply for a new credit card: If you don’t have a credit card yet, applying for a new card can help you diversify your credit mix. Use the card responsibly by making on-time minimum (at least) payments each month.
Take out a small personal loan: If your credit mix contains mostly revolving accounts like credit cards, taking out a small personal loan is an easy way to add to your credit mix. Taking on unneeded debt isn’t worth the slight boost, so only go this route if it makes sense.
Improving your credit mix won’t significantly impact your credit score. If you’re trying to improve your credit score as much as possible, though, focusing on your credit mix could help you reach your goal.
