Credit mix is one of the lesser-known aspects of credits, but having a good credit mix can offer notable advantages. Learning what it is can help you analyze and improve your credit score. Both the FICO and other credit bureaus use it to gauge how well you can juggle between debts. So what exactly is a credit mix, and how does it affect your credit score? Let’s break it down.
What Is a Credit Mix?
Credit mix refers to all the different credit accounts you have opened and how well you manage them. Credit accounts are generally categorized into two types:
- Installment credit: This is when you borrow a specific amount and are supposed to make a fixed repayment per month for a pre-determined time—for example, vehicle loans, mortgages, and personal loans.
- Revolving credit: You can borrow as and when you need money out of the approved credit limit. Also, you only repay if you have any outstanding balance. This can save money on interest: for example- credit cards.
The key difference between revolving credit and installment credit is that revolving credit offers you the flexibility to withdraw and repay. In contrast, installment loans provide you total loan amount upfront and pay a fixed monthly payment until you pay down the entire loan balance.
What’s An Ideal Credit Mix?
Having both installment loans and revolving loans are considered to be ideal. For example, you would have a healthy or perfect credit mix if you have one mortgage, one vehicle loan, and two credit cards and manage the repayments on time. One thing to be emphasized is that it’s considered healthy only when you are making the repayments on time. If you have only revolving or installment loans, it could reflect poorly on your credit report.
But what if you have 2-3 credit cards but don’t need a vehicle loan or any mortgage? Should you take an auto or personal loan in your report to have an installment loan? No! Your credit mix makes up only 10% of your entire credit score. If you are good with making the repayments, then a poor credit mix won’t affect your credit score because you have been making timely repayments. So don’t borrow money when you don’t need it just to have an ideal credit mix.
What Else Affects The Credit Score?
Credit mix isn’t the only or most significant factor affecting your credit score. There are four other factors that also impact your credit score as much as credit mix, if not more.
- Payment history: Your payment history notifies the lenders if you have a record of repaying on time or vice versa. This makes up about 35% of your credit score.
- Owed amounts: This refers to the debts you have on your existing credit accounts. This forms about 30% of your credit score. The amount of debt you are carrying to your available credit is known as the credit utilization ratio and should be maintained at 30% to avoid letting the lenders know that you are overextended and may not be able to make repayments in near future.
- Credit history lengths: This refers to how long you have had the credit accounts, how many of them you have, and when was the last time you used one of them. It forms about 15% of your credit score.
- New credit accounts: This refers to how many new credit accounts you have opened by account type and forms 10% of your credit score. Opening too many credit accounts would make you a credit risk to lenders and can affect your future loan applications.
Credit mix and the above-listed factors play a vital role in your credit score and affect it significantly. Maintaining a good credit mix is advised but not critical. However, it’s essential to be aware of how it works to maintain an ideal mix if you have multiple debts. Just make sure you repay all your loans and credits on time if you want a good credit score.