Whether you’re trying to improve your current credit score or you’re thinking about establishing credit, one of the key factors to consider is your credit mix. Your credit mix is essentially the different types of accounts you have on your credit report. This can include things like revolving credit — i.e., credit cards or lines of credit — and installment accounts like personal loans.
Your credit mix only makes up 10% of your FICO credit score. However, knowing how to build a good credit mix is still important to boosting your credit score. Here’s what a good credit mix is, and its overall impact on your credit.
- A credit mix refers to the types of loan or credit accounts you have, including things like lines of credit, credit cards, auto loans and mortgage loans.
- A good credit mix can help you build credit and improve your financing options.
- Your credit mix accounts for 10% of your FICO credit score.
- Having a good credit mix shows lenders and other creditors that you can responsibly handle several accounts at once.
How Your Credit Mix Works
Your credit mix refers to the various types of credit accounts you currently have, such as installment loans and credit cards. Creditors take it into account when determining your creditworthiness — that is, how likely you are to pay back what you owe. By having a diverse credit mix, you can show lenders and creditors that you are financially responsible and can reliably take on a new account.
The exact impact of your credit mix depends on the credit scoring model used. For example, a person’s FICO credit score consists of the following factors:
- Payment history — 35%
- Credit utilization or amount owed across all accounts — 30%
- Credit history length — 15%
- New credit or new accounts — 10%
- Credit mix — 10%
A person’s VantageScore, which is another common scoring model, consists of similar factors. This scoring system doesn’t use percentages, but it considers your credit mix “highly influential” to your overall credit score.
Regardless of which scoring system is used, having several different types of open accounts on your credit report can positively affect your credit score. These accounts will need to be in good standing, however. If, for example, you have a good credit mix but your accounts are past due, this can bring down your credit score.
What Is a Good Credit Mix?
Since your credit mix only accounts for a small percentage of your overall FICO credit score, you may not need to have a perfect mix to qualify for financing. However, it’s still a good idea to have a few different types of open accounts. Here are the most common types of credit that can help diversify your credit mix:
- Revolving credit: Revolving credit refers to any account that lets you continuously borrow against it (up to a certain amount). This includes things like personal lines of credit, home equity lines of credit and credit cards. With revolving credit, you’re responsible for repaying what you use plus any interest fees.
- Installment accounts: An installment loan is any loan that must be repaid in regular payments — usually monthly. These loans typically come with an interest rate, either fixed or variable, which is tacked on to your monthly payment amount. Common types of installment loans include personal loans, auto loans and mortgage loans.
If you’re trying to build a good credit mix, it might help to have several different installment and revolving accounts. But avoid opening too many new accounts at once. Not only will you be responsible for repayment, but new forms of credit also impact your credit score. If you open several new accounts in quick succession, it could actually hurt your score temporarily.
Examples of a Good Credit Mix
Generally speaking, lenders and other creditors prefer working with people with a diverse mix of credit. But it’s not always easy to tell what constitutes a “good” credit mix. This is because the impact of taking on a new account can vary based on the individual and their current credit profile.
That said, here are a couple of examples of what a good credit mix might look like:
- An auto loan, a credit card and a mortgage
- A student loan, a personal loan and an auto loan
- An unsecured credit card, a secured credit card and a personal loan
Using Your Credit Mix To Build Credit
Your credit mix can help improve your credit score, especially if you’re just starting out and don’t have much of a credit profile yet. By opening and managing several different types of accounts, you can start building credit over time. Just be sure to do it responsibly.
And remember, your credit score also consists of things like payment history and credit utilization. So, make sure you pay your bills on time and try to keep your balances low.
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