A credit mix refers to the different types of credit accounts you have.
The impact of a credit mix on your credit score varies, depending on the credit scoring model used. Lenders and creditors generally want to know how you have managed different types of accounts over time.
Credit mix is one of several factors that affect your credit score.
It is used to consider your ability to juggle different types of credit accounts.
That means both:
- revolving credit, typically credit cards
- and installment credit, which are loans with a set term and level payments, like a car or student loan, or a mortgage
A credit mix makes up 10% of your FICO credit score, so it’s a less important metric. Nevertheless, it is always good to have knowledge of how credit mix works, and leverage it to boost your credit scores.
Let’s take a look at what credit mix means and how it influences your score.
What is a Credit Mix?
A credit mix is a variety of credit accounts you have, such as:
- loans
- credit cards
- mortgages
It’s a factor that’s typically taken into account when determining your credit ratings. The importance that element is given will depend on the credit scoring model (Methods used to determine credit scores).
Lenders and creditors prefer to see that you have a diversified credit mix, which shows that you can safely manage a variety of credit accounts over time.
Why Do Lenders Like Credit Mix?
When lenders are making a decision on what loans or interest rates to offer you, it helps them to see a steady payment record on a mix of credit types. It shows that you can manage the different obligations that come with borrowing all kinds of debt.
Having a diverse variety of credit products certainly helps in achieving the best credit score.
What Are the Different Credit Types?
There are two kinds of credit: revolving and installment.
1. Installment credit
Installment credit provides a borrower with a fixed, or finite, sum of money over a predetermined period of time.
The borrower will be aware in advance of the total number of installments. These are also known as monthly payments, as well as the amount of each installment. Examples of installment credit include:
- mortgages
- school loans
- vehicle loans
- personal loans
2. Revolving credit
A revolving credit extends borrowers a line of credit with no determined end time, and they can spend up to their assigned credit limit.
There is no defined balance or termination date for revolving credit.
A minimum payment is required each month, rather than the balance being spread out evenly over a predetermined period.
Although it is optional, consumers might choose to pay more than the statutory minimum. The most popular form of revolving credit is through credit cards. Another kind is a home equity line of credit (HELOC).
A combination of revolving and installment credit is the best credit mix.
Revolving credit (such as credit cards) illustrates to lenders that you are able to borrow varying amounts of money each month and consistently pay it back.
Meanwhile, installment credit (such as loans) demonstrates your ability to uphold a long-term agreement and make fixed, on-time payments until you repay what you borrowed.
What Isn’t Part of a Credit Mix?
Payday loans and title loans are two of the most popular loan kinds that are excluded from credit mix calculations.
Payday and title loan providers don’t report these loans to credit bureaus. They have no effect on your credit scores and won’t appear on your credit record. Even if you consistently make on-time payments on your payday loan, it won’t appear on your credit record.
The only caveat is if you fall behind on a title loan or payday loan. It might be sold to a collection agency in this situation, which will subsequently report it to your credit bureau. In other words, while payday and title loans can’t improve your credit, they most certainly can damage it.
Does a Lack of Credit Mix Hurt Credit Scores?
Your score shouldn’t be much affected if you simply have one sort of credit on your profile.
Without a variety of credit, it may still be possible for you to join the coveted “800 club,” albeit it will be more challenging.
However, having a variety of credit can assist you to achieve your goal of having the best credit score possible. It takes inches to protect your financial future, so even a modest percentage like 10% of your credit score should be handled carefully.
How to Know Your Credit Mix
Pull your credit report for free from each of the three major credit bureaus to discover how your credit mix compares.
This is a fantastic starting point for monitoring your credit because it gives you an accurate view of your financial situation. Personal data, account information, enquiries, and information from public records are all listed in credit reports.
There should be a section listing all of your credit accounts while examining your credit report.
Want to know where to pull your credit report from?
Read this article next: How to Check Credit Reports for Mistakes & What to Do About Them
Key Takeaway on Credit Mix
If you want to keep your credit or raise it, it’s essential to understand credit mix and the impact it has on your credit scores.
Handling different kinds of debt can be more straightforward than you think. However, having knowledge of credit mix is not a sanction to go borrowing. The key thing is not borrowing more than you can afford.
Knowing when and how to utilize debt is an important skill in achieving financial independence.
Editor’s note: This article was originally published Oct 17, 2022 and has been updated to improve reader experience.
