Credit mix refers to the variety of credit types you have in your credit report. There are four types of credit: Installment Loans, Revolving Credit, Open Credit, and Service Credit. Having a healthy mix of these four credit types makes up 10% of your FICO score.
Key Takeaways
- A good credit mix is proof that you can manage your financial obligations properly
- There used to be only three types of credit before the addition of Service Credit
- Service Credit refers to your utility payments (which unfortunately aren’t often reported)
- Having a credit card and two active installment loans is a good credit mix
Why Is Credit Mix Important?
A good credit mix can be used as proof that you can manage your financial obligations properly. Of course, this is only the case if you make all of your payments on time.
You’re probably thinking that having a bunch of credit cards (revolving credit) that you pay off every billing cycle is proof enough that you can handle your finances. And this is true since lots of people have reached Prime Credit Scores by just utilizing only one or two credit types.
However, it’s much more difficult to track loans of different types. This means that a person who successfully manages a variety of credit types should be a bit more financially savvy than a person who only focuses on one type of credit. Hence, the 10% weight of credit mix in your FICO score.
How Does Credit Mix Affect Your Credit Score?
Credit mix is a small factor in your credit score, but it can make the difference between having good or excellent credit. If you have diverse types of accounts on your file, they will be weighted more favorably when calculating your credit score.
Your mix of credit is weighted as heavily as new credit that you’ve applied for recently — both of which account for 10% of your score. Your payment history, credit utilization, and length of credit history account for far more of your score; however, credit mix should not be overlooked.
4 Different Types of Credit
There are four major types of credit: revolving credit, installment loans, open credit, and service credit.
- Revolving Credit: With this type of credit, you can either pay the balance in full or make a minimum payment amount and revolve the debt to the next billing cycle. (Credit Cards)
- Installment Loans: A type of credit that requires you to pay off a set amount of money in installments over a predetermined period of time. (Mortgage, Car Loans, BNPL)
- Open credit: Accounts that you can borrow from up to a credit limit but must pay back in full each month. Open credit is a rare form of credit. (Charge Cards)
- Service Credit: Experian now considers payment for services like electricity, natural gas, cable, internet, cellular, and other bills as a type of credit.
How to Build Your Credit Mix
When building your credit mix, you should apply for new accounts periodically and thoughtfully. In other words, you shouldn’t apply for too many accounts at once, or just for the sake of diversifying your credit mix.
Credit inherently comes with risk, not only for the lender but also for you — the borrower. Opening multiple new credit accounts at once could be financially damaging in a number of ways.
First, you will initially see a drop in your score, as all of these applications require hard inquiries by lenders and credit card issuers in order to approve you for credit. You will also have to deal with the additional financial and emotional stress of keeping up with a number of important payments.
Making payments on time is the single most important thing that can help your credit score. If you apply for new accounts and are not able to make the payments, you will see more damage to your score than if you had not built your credit mix in the first place.
In general, it’s better to apply for the financial services that you need instead of applying for the sake of increasing your credit mix.
