What is a credit mix?

Written by
Brian O’Connell
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Good credit can be the difference between being approved for an auto loan or credit card or being rejected.

Moreover, credit scoring agencies place significant weight on the various forms of credit you own. That factor, known as a “credit mix,” determines about 10% of your FICO credit score.

That’s why it’s in your best interest to optimize the management of multiple debts and loans for things like mortgages, auto loans, credit cards, personal loans, lines of credit, small business loans, and student loans.

Here’s a closer look at credit mix – what it means, how it works, and action steps needed to manage your credit mix to keep your credit score solid.

Credit mix defined

Lenders and credit scoring models often consider the types of credit accounts – revolving credit, installment credit, and open credit – you have when assessing your creditworthiness. A credit mix refers to the variety of credit types that make up your overall credit profile.

Does your credit mix impact your credit score?

Yes, a diverse credit mix can positively impact your credit score, as it demonstrates your ability to manage different types of credit responsibly.

It’s one of the “big five” calculations credit scoring firms use when formulating a credit report and credit score, along with payment history (35% of your total score), total amount of debt owed (30%), length of credit history (15%), and new credit (10%), your credit mix makes up 10% of your overall credit score.

“The major credit bureaus determine your credit score by assessing several different factors, including how long you’ve had credit, how consistent you are with on-time payments, and the different types of credit accounts you have open,” says Zach Robbins, founder of Loanfolk, a consumer credit and loan services company in Wilmington, Delaware.

In the eyes of the three major credit bureaus (Experian, Equifax, and Transunion), the more diverse the mix, the better. “In total, your credit mix only accounts for 10% of how your credit score is calculated, but it is still an important factor to consider if you are looking to optimize your score,” Robbins adds.

What are the different types of credit?

“There are two different credit types: revolving accounts and installment accounts,” says Robbins.

Revolving accounts include credit cards, personal lines of credit, and home equity lines of credit. “These are accounts that you can continually borrow against and restore as you repay,” Robbins adds.

Installment accounts include mortgages, personal, student, and auto loans. “These are accounts that provide a lump sum upfront, and you repay over time to zero out the balance,” says Robbins. “A healthy credit mix combines both revolving and installment accounts.”

Other types of credit accounts can include retail credit, where a consumer has a credit card with a specific retailer, and “open accounts,” which include everyday household bills like cell phone and utility bills.

How a credit mix works

Credit scoring agencies use credit scoring models to evaluate your credit mix and determine your ability to responsibly manage different types of credit.

“Lenders prefer to see a diverse mix of credit accounts because it demonstrates your ability to handle various financial obligations,” says Erika Kullberg, an attorney and founder of Erika.com, a personal finance advisory and review platform.

A well-rounded credit mix can positively impact your credit score by showcasing your ability to manage different types of credit responsibly. “Conversely, a limited or unbalanced credit mix may result in a lower credit score as it suggests a lack of experience or diversity in managing credit,” Kullberg says.

A good credit mix typically includes a combination of revolving credit accounts such as the ones previously mentioned (credit cards, mortgages, and auto loans). “This demonstrates to lenders that you can effectively manage both short-term and long-term financial obligations,” says Kullberg. “A bad credit mix may consist of only one type of credit account, such as having only credit cards or solely installment loans.”

What is a good credit mix?

Having multiple credit and loan debts that are consistently repaid on time shows credit scoring agencies you’re a well-rounded borrower who can adequately manage different sizes and types of credit.

In contrast, the only “bad mix” of credit is no credit.

“Ultimately, the credit bureaus are looking for evidence that you can responsibly manage different types of credit over time, and something on your credit report is always better than nothing when looking to build your credit score,” says Robbins.

For someone just starting out, it’s better to have a small number of accounts, such as a secured credit card and student loan. “As you pay down those loans and credit accounts, work your way up to a bigger mix to include unsecured credit cards, mortgages, auto loans,” Robbins advises.

How to improve your credit mix

Always be diversifying. To leverage your credit mix to improve your credit score, diversify your credit portfolio by responsibly managing different types of credit accounts. “For example, if you only have credit cards, consider adding an installment loan, such as a small personal loan, to your credit mix,” says Kullberg.

Aim for having multiple credit accounts that represent both revolving and installment credit.

“For example, credit cards, personal loans, mortgages, and auto loans. In combination, these show that the borrower can handle various types of credit and loan sizes responsibly,” says Robbins. “Having a diverse mix of credit accounts that you consistently pay on time and keep low balances on is the recipe for a superstar credit score.”

Pay all of your bills on time. A great credit mix only works if you make timely payments on all accounts and avoid taking on more credit than you can comfortably manage. “If you’re not careful, taking on additional credit may leave you in a worse position than before, with timely payments remaining the largest factor in determining your credit score,” Kullberg says.

Track your credit report regularly. Understanding the importance of a diverse credit mix is essential for maintaining a healthy credit score. By actively managing various credit accounts and making timely payments, you can demonstrate your creditworthiness to lenders and improve your overall financial health. However, remember to monitor your credit report regularly to see if there are any issues or inaccuracies. You may see a slight ding in your credit score when taking on new forms of credit due to hard credit inquiries, but these are temporary and are typically restored within a few months.

Brian O’Connell
Cardratings Contributor

A former Wall Street bond trader, Brian O'Connell is the author of two best-selling books: The 401k Millionaire and CNBC's Creating Wealth. His work is bylined in national finance and business platforms like TheStreet.com, CBS News, The Wall Street Journal, U.S. News & World Report, Forbes, Fox News, and many others. Mr. O'Connell is a graduate of the University of Massachusetts and he currently resides in Palmas del Mar, Puerto Rico during the winter months, and in historic Bucks County, Pa., when Mother Nature cooperates.

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