How Different Types of Credit Can Boost Your Credit Score
Mixing up your credit can actually make you a less risky borrower.
Your credit score is an important number for anyone who plans to apply for a credit card or loan. It is also handy to validate that you have been making the right decisions with your use of credit. Since banks base approval and pricing on credit scores, it’s in your best interest to have the best credit score possible. That means taking advantage of every factor that will help boost your score—like using different types of credit.
One of the five key factors in your credit score is your mix of credit. This factor, which counts for 10% of your FICO credit score. This portion considers how much experience you have with different types of credit accounts. Your credit score reflects how well you manage different types of credit.
The Different Types of Credit You Can Have
Credit scoring calculations don’t reveal the specific number of points you can gain by adding different types of credit. A new account will affect each person’s credit score differently, depending on their other credit report information.
Collection accounts are another type of account that may appear on your credit report, but it’s better if you don’t have experience with collections since they hurt your credit score.
Having experience with different types of credit shows that you can handle various types of credit obligations. Being able to manage a mortgage is a much different type of responsibility than managing a credit card or even an auto loan. The FICO score even considers people who have no experience with credit cards as riskier borrowers. If you only have installment loans on your credit report, adding a credit card can help boost your credit score.
Warning About Opening New Accounts
You shouldn’t open new accounts simply for the sake of trying to boost your credit score by having a mix of credit. Instead, add accounts over time as you need to and your credit score will rise naturally.
For example, it’s not a good idea to get a mortgage for the sole purpose of adding a real estate account to your credit score. Instead, you should buy a home when you’re financially prepared. Plus, having a positive mortgage history may help your credit score in the long run, but many borrowers experience a credit score drop in the first several months after getting a mortgage.
Adding debt too quickly can lead to bigger debt troubles. Taking on too many accounts at one time can make it hard to keep up with all your payments. You may end up overextended and damage your credit by missing payments.
Each time you apply for new credit, an inquiry is made to your credit report to determine whether you qualify. These inquiries count for 10% of your credit score and can cause you to lose a few credit score points.
Can a Poor Mix of Credit Hurt Your Credit Score?
Your experience with different types of credit is only a small part of your credit score. The mix of credit accounts for only 10% of your total FICO score. However, this 10% can cause an impact and play a bigger role when you don’t have much other information on your credit report.
A few other factors have a more significant role in your FICO credit score. Payment history is 35% of your credit score. The amount of debt you’re carrying is 30% and the length of your credit history is 15%.
The VantageScore, which is another credit score some lenders use, combines a mix of credit with the duration of credit and percent of credit being used.
Not having a mix of credit won’t necessarily cause you to have bad credit. As long as you’re paying your existing accounts on time, your credit score will improve as you gain a solid positive payment history. However, you may not be able to achieve a credit score of 800 or higher until you have multiple types of credit on your credit report.
Even so, you can qualify for the best interest rates with a credit score above 760. No matter the types of credit you have, the best way to boost your credit score is to make your monthly payments on time and don’t overextend yourself with debt.