Every credit score is based on five key factors. Your Credit Mix contributes only 10% to your overall score, but the importance of a diverse credit mix shouldn’t be underestimated. It’s a small but significant part of your credit health that deserves attention. Every little bit counts!
- Diversify Your Credit. Strive for a balance between revolving accounts (like credit cards) and installment loans (such as auto or student loans) to enhance your credit mix.
- Consider Your Credit History. Be cautious about closing old accounts, as this can affect your credit mix and history. Keeping a mix of older, well-managed accounts is beneficial.
- Manage Your Credit. Adding new credit types is useful, but always focus on responsible credit usage and timely payments to maintain a healthy credit score.
What Is Credit Mix?
Your FICO credit score is built upon five main factors, and your credit mix is one of them. The Credit Mix portion of your score is a measure of your creditworthiness based on the types of credit lines you have open.
There are many different types of credit accounts, but when it comes to calculating Credit Mix, only two key categories matter: revolving credit and installment loans.
Revolving credit usually consists of credit cards but can include other types of revolving accounts like store credit lines, virtual credit cards, and a Home Equity Line of Credit or HELOC. A revolving account allows you to keep charging against the account as long as you stay below your credit limit and make regular payments.
Installment loans are loans with a fixed amount and regular payments. This could be a student loan, auto loan, mortgage, personal loan, or credit-builder loan. If you borrowed a specific amount and you’re paying in monthly installments, it’s an installment loan.
👉 The balance between these types of accounts defines your credit mix.
How Credit Mix Affects Your Credit Score
While FICO closely guards their proprietary algorithms for credit score calculations, they do give us a few hints on how the different credit management factors influence our credit scores.
The FICO scoring model uses five differently weighted categories:
- Payment History – 35%
- Amounts Owed – 30%
- Length of Credit History – 15%
- Credit Mix – 10%
- New Credit – 10%
From this breakdown, we can see that your credit mix isn’t the most significant portion of your score calculation, but it is still substantial.
Having a good balance of different credit types will benefit the credit mix portion of your score. Having too few accounts, having only one kind of account, or unnecessarily closing your accounts could damage the credit mix portion of your score.
How to Improve Credit Mix?
There is no ideal credit mix. Or more specifically, there is not a set number of credit accounts that are too many or too few.
A good goal to shoot for is having at least 1 revolving account and 1 installment account open.
💡To improve your credit mix, start by assessing the credit lines you already have open. Then choose one of these strategies.
1. Open a Credit Card
If you are just starting to build credit, then you may have a thin credit file. This is a credit report that only contains a small number of open accounts that have only been reporting for a short period of time.
If you have a thin credit file you may have a low credit score even if you have made payments regularly. You may not have enough information in your file to generate a score.
If your existing credit lines currently being reported consist of just student loans or a car loan, then your best course of action for improving your credit mix would be to open a credit card. You have installment loans, so a revolving credit account will improve your credit mix.
But don’t just go out and apply for the first credit card you find.
Having a thin credit profile will likely mean that you won’t qualify for some credit cards. Unnecessary rejections will damage your fledgling credit score. So instead, you’ll need to do some research to find a credit card that you are likely to be approved for before you apply.
You should also be aware that while being added as an authorized user on someone else’s credit card can help, having a card in your own name is given much more weight in credit score calculations.
2. Take Out a Loan
What if you find yourself in the reverse situation? You may find that all of the credit accounts you have reporting are revolving accounts. Perhaps you recently paid off a car loan or student loan, or you didn’t use student loans and haven’t bought a car. The only accounts you have could be credit cards.
Paying off a loan shows creditors that you are responsible enough to pay off your debts, but the account is no longer factored into your credit mix once the loan is paid off and closed.
While you should not run out immediately and purchase a high-cost item just to take out a loan, adding a new installment account to your credit can help you achieve the best score possible.
If you have a high amount of credit card debt, perhaps you can take out a debt consolidation loan. Or, if you need new furniture or another major purchase, purchase it using a payment plan (check the interest rate first).
If you have a low credit score and find it difficult to qualify for a traditional loan, you can always open a credit builder loan.
It is important to note that title loans and payday loans do not get reported to the credit bureaus unless you miss payments and the account is sent to collections. So these types of accounts won’t help your credit mix. They will also cost you a fortune in interest payments, so it’s better to avoid them!
3. Don’t Close Existing Accounts
The best way to build up the Credit Mix portion of your score is to be on the lookout for problems before they arise.
Let’s say you have some savings built up and a car loan that is a few months shy of being paid off. You might be tempted to go ahead and pay off that auto loan. But, if this is the only installment account you have reporting, paying off the loan could hurt your credit score.
If you anticipate needing a good credit score soon (for example, if you’re considering applying for a mortgage) you might want to consider postponing paying off your loan until after you have taken care of this.
Or perhaps you are looking to close a credit card account, maybe because you don’t use the card or because it has a high annual fee.
If you only have one or two revolving accounts open, closing one will definitely hurt your score. Your credit mix won’t be the only affected area. Closing one of your older accounts will reduce the length of your credit history and closing a credit card could raise your credit utilization rate.
If you are not using the card, but there are no fees associated with it, you are often better off keeping the card and stashing it in your sock drawer (or another safe place).
If you wanted to close the account because of hefty fees, it might be better to first see if you can move your account to a different card that doesn’t have fees.
Credit Mix Examples
Each credit profile is unique.
Each of us has different goals, career paths, life events, and more, which naturally results in a wide variety of credit account mixtures. So what would be a good credit mix, and what would be a credit mix that needs improvement?
What Is a Good Credit Mix?
Diversification is important, but the good news is that you don’t need one of every type of credit line open.
Ideally, you’ll want at least one of your accounts to be an installment loan and two or more of the remaining accounts to be revolving accounts.
Considering this, the following example would be a good credit mix.
- 2 credit cards
- 1 auto loan
- 1 student loan
These accounts will give this individual a nice mix of credit types and help to protect them from a significant score drop when they close an account.
What Is a Bad Credit Mix?
Having only revolving accounts or only installment accounts open will have a negative impact on the Credit Mix portion of your score. You could have 5 accounts reporting to the credit bureaus, but if all of them are revolving accounts, this will be bad for your credit mix.
Having too few accounts open is not ideal either. You may only have 1 loan and 1 credit card reporting. This is a good start, but it might not be enough to grow your credit score as fast as you want.
A diverse credit mix improves your credit score because it shows lenders that you are capable of handling different types of credit. A balanced credit mix shows that a borrower understands credit and uses it effectively.
There are many important factors in building your credit. While credit mix is a relatively small factor in your credit score calculations, improving your credit mix could have other positive impacts on your credit score, like decreasing credit utilization when you open a new credit card.
If you’re just getting started with building credit, making a conscious effort to achieve a balanced credit mix will help you reach a scorable level and build a good score.
The keys to building credit are still the same: make all payments on time, use only the credit you need, and keep the balances on your revolving accounts low. Understanding the less significant parts of your credit score can still help you achieve your credit goals faster!