Your credit mix is one of the five main factors that affect your credit score. Lenders want to see that you can manage different types of loans from revolving accounts like a credit card to installment accounts like a mortgage or auto loan. If you hope to build good credit, we explain below how diverse types of accounts can help improve your financial standing.
What does “credit mix” mean?
The term “credit mix” refers to the types of accounts on your credit report. While FICO ®®and VantageScore, the two primary credit scoring models weight credit mix differently, it is , but “mix of credit types” is one of the least significant factors on your credit score.There are two main types of credit:
- Revolving lines of credit. A revolving line of credit is an amount of money that you can borrow freely with a cap known as a “credit limit,” which determines how much can be borrowed over a certain period of time. . Credit cards are one of the most common types of revolving lines of credit. For example, a credit card issuer may offer you a credit line of $5,000. You would make monthly payments and may incur interest charges if you carry a balance.
- Installment loans. Installment loans refer to a set amount of money that you borrow and agree to pay back based on a fixed, recurring repayment scheduleThese installment payments include a portion of the principal balance (the amount of money you borrowed) and the interest (a percentage that the lender charges for allowing you to borrow the money). Auto loans, student loans, mortgages and personal loans are among the most common types of installment loans.
Why is credit mix important?
is FICO® scores are the most commonly used credit scoring models in the United States. To calculate your score, FICO ®®collects information about your credit history from the three main credit bureaus: Equifax, Experian, and TransUnion.
There are five main factors that FICO takes into consideration when calculating your credit score. Each factor receives a different weight:
- Payment history (35%). Your payment history has the most influence on your FICO score. Your credit score will benefit if you make regular timely payments on all of your accounts. On the other hand, your credit score can drop significantly even if you’re late with a single payment. Credit utilization rate(30%). Credit utilization rate refers to the amount of credit you use compared to the total amount of credit available to you. The lower your credit utilization rate, the better, as this may signify that you are a responsible borrower. Meanwhile, a higher credit utilization rate indicates that you rely heavily on credit to make purchases. Ideally, you should keep your credit utilization rate under 30%. For example, if your total available credit across all of your accounts is $10,000, then you should aim to use no more than $3,000 of that available credit at a time.
- Length of credit history (15%). Length of credit history refers to the average age of all of your credit accounts, including the dates that the accounts were opened and the lines of credit or loans that are currently active. The older your credit age, the better. To lenders, an older credit age suggests that you have more experience borrowing money and managing debts.
- New credit applications (10%). Your score and creditworthiness will fall if you apply for multiple loans and credit cards in a short period. Lenders may assume that you are in financial distress and might not be able to repay your debts.
- Type of credit (10%). A diversity of credit indicates to lenders that you are a more experienced borrower. Having both revolving credit (like credit cards) and installment accounts (such asa car loan, student loans, personal loans, etc.) helps with your FICO score.
All of these factors are combined to calculate your total credit score, which is a three-digit number that ranges between 300 and 850.
A higher credit score indicates that you are more creditworthy, meaning that you’re more likely to be more eligible for loans and credit lines with higher credit limits and better interest rates.
On the other hand, a low FICO score indicates that you have bad credit and may be a credit risk. This could lead to lower credit limits with higher interest rates.
While credit mix doesn’t have as much bearing on your FICO score as other factors like repayment history and credit utilization rate, it’s still important. The shorter the length of your credit history, for example, the more credit mix matters. Why? Because if your credit history is short, the details of your borrowing track record will be minimal. The more accounts on your file, the more information lenders can draw on to determine whether or not you are a responsible borrower.
Types of credit accounts FICO takes into consideration
The FICO scoring model considers the variety of credit accounts (installment loans and revolving lines of credit) as well as the number of credit accounts, listed on your credit report.
However, the total number of credit accounts isn’t as important as making sure that you have a variety of them. In other words, having experience managing both types of credit accounts is what matters most—not how many accounts you have managed.
There are various types of installment credit and revolving accounts on your credit report, which FICO will use to determine your credit score. These include:
- Personal loans
- Auto loans
- Student loans
- Personal loans
- Mortgage loans
- Bank-issued and credit union issued credit cards
- Retail (store-issued) credit cards
- Gas station credit cards
- Home equity lines of credit
Should you apply for multiple types of credit?
Don’t apply for several types of credit over a short period just to make your credit history more diverse. Doing so could harm your credit score more than help it.
Credit mix and credit applications each count for 10% of your total FICO ®score. As such, applying for multiple loans and credit cards at one time can bring your credit score down.
Remember that multiple applications for new credit accounts at one time can be seen as a sign of financial distress. Applying for several loans or charge cards at once may raise a red flag that can prevent you from securing a good interest rate and a high credit limit.
This is especially true if your credit history is short. This may also apply if you’ve made late payments on any of your existing loans or credit cards.
The act of applying for multiple lines of credit at one time may bring down your credit score and affect your payment history. For example, if you are approved, there’s a chance that you might not be able to repay the loans in a timely manner. Since payment history accounts for 35% of your FICO score, missing even one payment can seriously damage your credit.
While a credit mix, such as having both a car loan and a credit card, can benefit your credit score, it’s important to do so wisely. Don’t feel obligated to take out more credit just to vary your history. You should only add new lines of credit to the mix if you can responsibly manage your accounts.
For more resources on how to navigate your new life in the U.S., visit Nova Credit’s resource library where you can learn about everything from renting an apartment to finding the best credit cards for noncitizens.
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