How Your Credit Mix Affects Your Credit Score
Picture a juggler. You wouldn’t be that impressed to watch someone juggle two beanbags. But what if he added a bowling pin, a knife and a flaming baton? Now it starts to get more impressive. Of course, if he adds too many items into his act, there is a greater chance of him dropping everything.
You can think of credit mix — one of the key components of your credit score — in the same way. While it’s most important to master how well you use credit (making on-time payments and keeping balances in check), adding some variety into your credit “juggling act” could be what helps move your credit score into a higher tier.
“Building a mix of credit happens naturally over time,” said Rod Griffin, director of consumer education and awareness at Experian, one of the three major credit bureaus. “It’s not something you can do overnight.”
In other words, you can’t maximize the credit mix portion of your credit score by going out and applying for an auto loan, a mortgage and three credit cards in one week. (Hint: That would actually be a bad idea. See “new credit” below.) Credit mix is something that improves as you gradually add different products to your portfolio, provided you manage them all responsibly.
Here’s a closer look at how your credit mix affects your score.
What factors affect your credit score?
The credit score most commonly used by lenders is the FICO® Score. It ranges from 300 to 850 and is determined by the following factors:
- Payment history: As the most influential factor, payment history accounts for about 35% of your score. It’s a measure of how you’ve paid bills in the past and is considered a good predictor of whether you’ll be a responsible borrower in the future.
- Amounts owed: The second most important factor is amounts owed, which accounts for about 30% of your score. A major part of this is your credit utilization rate, or how much credit you are using compared with the amount you have available. If you have a credit line of $10,000 and you owe $8,000, your credit utilization rate is 80%. Lenders generally prefer to see utilization rates below 30%.
- Credit history length: How much experience you have with credit matters to the tune of 15% of your score. The best way to maximize this factor is to keep your oldest accounts open and manage them well.
- Credit mix: In addition to how long you’ve been using credit, lenders care about the types of credit products you use. Credit mix makes up about 10% of the score calculation. Simultaneously managing different types of products well indicates that you are creditworthy.
- New credit: The final 10% of the score calculation involves the number of accounts you’ve recently opened. The idea is that if you open several accounts in a short period of time, it may suggest that you’re having cash-flow problems.
VantageScore is another popular credit-scoring model that also ranges from 300 to 850. Credit mix may have a bit more influence in this algorithm, with “type and duration of credit” on par with credit utilization as a “highly influential” factor.
Types of credit accounts
So why do lenders and creditors care about your credit mix? “A mix of credit shows you are able to manage different types of credit and do it well over time,” said Griffin. When paired with the length of your credit history, a good mix helps depict you as an experienced borrower, he added.
FICO Scores consider your mix of accounts such as credit cards, retail accounts, installment loans and mortgage loans. Here are the two main types of credit:
Credit cards are the most common type of revolving credit. Revolving means that you have access to a line of credit and you can use as much or as little of it as you’d like at any given time. The payment due each month will vary depending on your balance. A home equity line of credit (HELOC) is another example of a revolving account.
Auto loans, mortgages, student loans and personal loans are all examples of installment accounts. These accounts have an end date and, in many cases, a fixed payment amount due each month.
Risks of actively trying to increase your credit mix
Opening a new account could benefit your credit mix and therefore your score — or it might not. “It really depends on the individual credit history,” Griffin said. He recommended requesting your credit report (at AnnualCreditReport.com) and your credit score, and then looking carefully at the risk factors that are listed. These will tell you exactly which areas you need to focus on in order to make score improvements.
“If credit mix is in the top one or two areas affecting your score, then it might make sense to get a small personal loan,” he said. Stick with a manageable amount that you can easily pay back each month, though. Paying an installment loan over time while keeping other accounts in good standing will demonstrate that you are responsible.
However, in many cases, taking on additional new debt can be a big mistake if it turns out that you don’t manage it well. “If you have too much debt already and open a new product, that compounds the problem instead of making it better,” said Griffin. Plus, bear in mind that the “new credit” portion of your score takes a minor, albeit temporary, hit every time you apply for new credit.
The bottom line
“Giving broad advice around opening new accounts to improve credit mix is risky because everybody’s situation is unique,” according to Griffin. When it comes to improving your credit score, only two strategies are universal: Pay on time, and keep balances low. Once you have those aspects mastered, consider turning your focus to your credit mix.
Of course, if you are in the market for a loan product anyway, do your research to choose one that is manageable and has the best terms for you. Once you have a track record of consistent monthly payments, it might add some credit mix points to your total score.