Credit mix is a lesser-known aspect of credit, but understanding it can help you interpret and improve your credit score. It contributes to your FICO score, the credit score used in 90% of lending decisions in the U.S., and can communicate to potential lenders how you manage different kinds of credit accounts.
Learn what credit mix is, how it impacts your score, and how to improve your mix of credit accounts.
What Is Credit Mix?
As the name implies, credit mix represents the types of credit accounts you have in your credit report. It’s also one of the main factors that go into your credit score.
You establish your credit mix by applying for and maintaining various types of credit accounts, from revolving accounts like credit cards to installment accounts such as mortgages and other loans. Namely, a good credit mix means you have both revolving and installment accounts, as well as a blend of different types of each.
This type of credit has no fixed end date for the borrowing period and no set balance that must be paid monthly. Although you'll need to make a minimum payment by the payment due date, you can pay more than the minimum, which affords payment flexibility. In other words, you can use revolving credit over and over again, provided you don’t use more than your credit line allows and you make payments on time.
Revolving credit accounts include:
- Credit cards: These include credit cards issued by a bank and retail credit cards issued by brick-and-mortar stores.
- Personal lines of credit: These credit accounts let you borrow money against a lender-approved credit limit and repay it in varying amounts over time.
- Home equity lines of credit (HELOC): These accounts allow you to borrow money multiple times, up to a maximum amount. Your home secures the amount you borrow.
As your home secures a HELOC, if you fail to pay your debt, you can lose your home, because the lender can sell it to recoup what you owe.
Installment credit, or non-revolving credit, is a type of credit that has a fixed end date and fixed payments every month until you pay off the full balance. Typically, you borrow a sum of money and repay it over a set amount of time. If your loan has a fixed interest rate, your payments will be the same each month.
Installment credit accounts to consider in your credit mix include:
- Student loans: These are loans you take out from the federal government or a private lender to fund your education.
- Mortgages: These are loans you take out to buy or refinance a home.
- Car loans: These are loans for which the vehicle you acquire serves as the collateral.
- Personal loans: Consumers typically use these loans to make large purchases or consolidate high-interest debts.
A good credit mix doesn't mean having every major type of credit. It’s not a key aspect of your credit score unless you lack sufficient credit history. Then it may impact your credit score a bit more.
How Does Credit Mix Impact Your Credit Score?
The credit mix reflected in your credit reports is an important contributor to your credit score because it tells lenders how well you can juggle multiple credit accounts. However, credit mix only holds as much weight in your credit score as the “new credit” aspect of your credit history: 10% of your FICO score. So, while a good credit mix can give your credit score a slight boost, or even help you achieve a score deemed "excellent," a lackluster credit mix won't have a sizeable negative impact on your score.
By the same token, taking out a new loan won't necessarily help your credit score improve much, but opening too many accounts in a short period of time can lower your credit score by a few points because of the inquiry on your account.
Lastly, 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.
So do strive for a good credit mix to bolster your credit score, but don't apply for loans you don't need because you're worried about your credit mix.
While “credit mix” and “credit utilization” sound similar, they’re very different. Credit utilization represents the credit you are currently using relative to your available credit. So if you have a $1,000 credit limit on a credit card and spend $300 on the card, your credit utilization is 30%. Credit utilization reflects the amount you owe, which has a more substantial impact on your credit score than your credit mix.
How Can You Improve Your Credit Mix?
If you have no credit accounts in your credit report, the easiest way to improve your credit mix is to open a credit card and make minimum payments on time.
If you have credit accounts but don't have a robust credit mix, take an inventory of your existing accounts to determine the types of accounts you lack. Assess both the general account category (revolving or installment) and the specific accounts you hold in each category. Then, if you can shoulder new debt, consider applying for different accounts to diversify your credit mix and potentially boost your credit score.
For example, if you only have revolving credit, consider supplementing it with installment credit by taking out a small personal loan. Or, if your only form of revolving credit is a credit card, you may want to open a small personal line of credit to demonstrate to lenders that you can handle different types of credit.
What Else Impacts Your Credit Score?
Credit mix isn't the only factor or even the biggest one that determines your credit score. The four other factors that affect your credit score, in order of highest to lowest impact on your score, are:
- Payment history: This tells lenders whether you have a record of on-time payment on past credit accounts. It makes up a whopping 35% of your FICO score.
- Amounts owed: This represents the debt you carry on existing credit accounts. It makes up 30% of your FICO score. The portion of debt you carry relative to your available credit, known as your credit utilization ratio, should be 30% at most to avoid signaling to lenders that you're overextended financially and may miss future payments.
- Length of credit history: Representing 15% of your FICO score, this factor shows how long you've had credit accounts in general, how long you've held specific accounts, and how long it's been since you last used those accounts.
- New credit: This represents how many new credit accounts you have by account type and makes up 10% of your score. Opening too many accounts in a short period of time communicates to lenders that you're a credit risk. Although your FICO score only factors in new credit inquiries within the last 12 months, inquiries remain on your credit report for two years.
With these other factors cumulatively making up 90% of your credit score, establishing a good credit mix is useful but not critical if you want to see major improvements in your credit score. To do that, focus on making credit card and loan payments on time, keep your credit utilization ratio low, and maintain a long credit history while refraining from opening unnecessary credit cards.