How Does Credit Mix Affect Your Credit Score?
What’s Credit Mix and How Does It Affect Your Credit Score?
Credit mix is one of the lesser-known aspects of your credit score but it is still important to understand when you’re trying to make sense of your credit score. Credit mix accounts for 10% of your FICO score, and it can communicate to potential lenders how you manage different kinds of credit accounts.
As the name implies, your credit mix represents what type of open and closed accounts are in your credit report. It’s one of the major factors that go into your credit report and, ultimately, your credit score.
A good credit mix means you have both revolving and installment accounts. It also means you have a variety of types of installment loans and revolving credit accounts.
But first, a refresher:
- Revolving credit: You can use revolving credit over and over again, given you don’t use more than your credit line allows and you make payments on time. Examples include a credit card, personal line of credit, and a home equity line of credit.
- Installment credit: Installment credit is a type of credit that can’t be used again once it’s paid off. You borrow a certain sum of money and repay it over a set amount of time, and if your loan has a fixed interest rate, your payments are the same each month. Examples include a student loan, home mortgage, car loan, or personal loan.
A good credit mix does not mean you need every major credit line type. It’s not a key aspect of your credit score, unless you don’t have a large credit history to begin with. Then it may impact your credit score a bit more.
Don’t apply for a car loan just to improve your credit mix. Credit mix only makes up about the same as the “new credit” aspect of your credit history. (New credit also accounts for 10% of your FICO score.) Not only will taking out a new loan not necessarily help your credit score improve very much, but opening too many accounts in a short period of time can also negatively impact your credit score, due to the inquiry on your account.
Having too much debt can also hurt your credit score. On top of that, taking out a loan isn’t free—the cost of borrowing money isn’t worth the small credit score increase you might get with a better credit mix.
Instead of worrying about credit mix, focus on making loan and credit card payments on time, keep your credit utilization ratio at less than 30%, and refrain from opening unnecessary credit cards.
While “credit mix” and “credit utilization” sound similar, they’re very different. Credit utilization represents the portion of your credit you are currently using. So if you have a $1,000 credit limit on a credit card and spend $300 on the card, your credit utilization is 30%. Unlike credit mix, credit utilization has a major impact on your credit score.
The different factors that affect your credit score are—in order of importance—payment history, amounts owed, length of credit history, credit mix, and new accounts. Having a good credit mix means a combination of revolving and installment accounts, but it’s not the area to focus on if you want to see major improvements in your credit score.