What Is Credit Mix and How Does It Affect Your Credit Score?
Credit scores are an elusive topic, mainly because they are composed of so many moving parts that are equally elusive. Payment history, credit utilization, and the length of your credit history are some of the most important points of data that lenders and credit card companies report to credit bureaus. Further down the list of importance, there is another element that is taken into account when calculating your credit score: credit mix.
What Is a Credit Mix?
Your credit mix is the various types of credit accounts that you have under your name on your credit report. A good credit mix includes several different types of accounts, such as a mortgage, auto loans, student loans, credit cards, or other types of credit accounts.
When credit scoring agencies consider your mix of credit, they look at the type and number of accounts that you have. For example, if you have several credit cards but are not a homeowner or don’t have any other types of loans under your name, it can be harder to obtain a good score because there isn’t a sufficient amount of credit to offset the risk of lending to you.
In contrast, if an individual has a mortgage and several credit cards, their score will be stronger because of the diversity in types of accounts that they have on their file.
Credit mix can fluctuate over time as well. For example, when someone closes a credit card or pays off a student loan, the credit mix can change.
Why Is Credit Mix Important?
Credit mix is a major part of the credit scoring algorithm because it represents your risk. It can be beneficial to have several different types of accounts that are in good standing, rather than focusing on one type of account and neglecting others. This is because credit scoring agencies can get a more complete picture of your financial history when there are several different types of accounts to look at.
The credit mix in your file can affect the way you are seen by lenders. If a lender sees that you have a variety of accounts, they may be more likely to approve you for products and services, such as loans with lower APRs and interest rates. In the eyes of the lender, if you have an established history with a variety of account types, that means you will pay off your debt responsibly.
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.
For FICO Scores:
- Payment history = 35%
- Credit utilization = 30%
- Length of credit history = 15%
- Credit mix = 10%
- New credit = 10%
Different Types of Credit
There are three major types of credit: revolving credit, installment loans, and open credit.
- Revolving credit: A line of credit that you can use up to a credit limit, pay off either in full or a minimum payment amount, and reuse on a recurring (or revolving) basis. E.g. credit cards
- Installment loans: Types of credit that require you to pay off a set amount of money in installments over a predetermined period of time. E.g. mortgage, car loans
- 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 more rare form of credit. E.g. charge cards
Your credit mix includes all of the revolving, open, and installment accounts with your name on them. Different types of credit accounts can include credit cards, a mortgage, auto loan, personal loan, student loan, line of credit, or any other type of loan or credit account.
How to Build Your Credit Mix
It’s important to have a diverse credit mix because it can increase your chances of being approved for loans with lower APRs and interest rates. 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 or hurt 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.