What is mix of credit?

Highlights:

Whether you’ve already established a credit history or you’re wondering how to get started building one, you may not know what a “credit mix” means – or how having different types of credit may affect your credit scores.

Simply put, a credit mix refers to the types of different credit accounts you have – mortgages, loans, credit cards, etc. It’s one factor generally considered when calculating your credit scores, although the weight it’s given may vary depending on the credit scoring model (ways of calculating credit scores) used. In general, lenders and creditors like to see that you have a diverse credit mix – that is, you’ve been able to manage different types of credit accounts responsibly over time.

Generally, there are four different types of credit accounts you may find on your Equifax credit report.

Installment loans

An installment loan is a loan that’s paid back, generally with interest, through regular payments over a period of time, and the payment amount typically stays the same. When the loan is repaid, the account is closed. An example of an installment loan would be an auto loan.

Revolving debt

With revolving debt, you borrow money up to a certain amount (your credit limit) and pay it back – or pay a minimum payment, generally with interest, while carrying a balance. The amount owed can also be paid in full each month to avoid interest charges. Once that amount has been paid back, it is then available to be borrowed again. An example of revolving debt would be credit cards or lines of credit.

Mortgage accounts

Mortgage accounts may differ from other types of installment loans, as the interest rate can be fixed or variable. Fixed interest rates stay the same, while variable interest rates may change.

Open accounts

These types of accounts are ones where the balance is due to be paid in full each month.  One example is a credit card that requires payment of the balance in full each month, rather than allowing you to pay over time.  Another example of an open account would be a collection account where the entire past due amount is due in full, again rather than paying over time.

Successfully maintaining a diverse mix of types of credit may positively impact your credit scores. That doesn’t mean that you should open credit accounts you don’t need; instead, you might want to think twice about closing a paid-off credit card account, since doing so might have a negative impact on your credit scores for several reasons. For instance, closing the account may affect your debt to credit ratio, or the amount of credit you're using compared to the total amount available to you. Keeping the account open and using it occasionally may help maintain a healthy credit mix.

So, what does it mean to you and your FICO Score? Creditors assess the risk of lending money through a variety of factors, one of them being your ability to successfully manage different types of credit. FICO not only looks at the mix of credit you have but also at the payment history of these credit types. For instance, if you have a great mix of installment and revolving loans, yet your payment history is bad, your FICO Score will reflect that negative payment history, which represents 35% of your FICO Score.

For creditors, it stands to reason that the better you manage different loans and lines of credit, the lower their risk when lending you money.

Again, since credit mix is only 10% of your FICO Score, it most likely won't determine whether or not you obtain credit from lenders. However, if you're striving to bring your FICO Score to the highest level it can be, your credit mix can play a part.

Okay, so a good credit mix can help your credit score. Does that mean you should start applying for all the types of credit lines you don't currently have? No.

First and foremost, two things happen when you apply for multiple new credit lines within a short period of time:

Therefore, if you want to add something to your credit mix that's currently missing, balance the risk versus the reward. Is it worth a drop in your score to apply for a small loan to show creditors you can manage payments successfully? With credit mix being such a small percentage of your credit score, the answer is, "probably not." However, in the end, the final decision is yours.

Do you have experience with both revolving credit and installment type accounts, or has your credit experience been limited to only one type?

Revolving accounts are those that provide you with credit that allows more flexibility regarding the amount paid monthly (subject to any minimum payments required, and payment due dates, etc.). Some of these include:

These types of accounts usually require a fixed payment each month until the balance is paid down in full. A few examples of these are:

• Revolving Credit. This form of credit allows you to borrow money up to a certain amount.
• Charge Cards. This form of credit is often mistaken to be the same as a revolving credit card.
• Installment Credit.
• Non-Installment or Service Credit.

Simply put, a credit mix refers to the types of different credit accounts you have – mortgages, loans, credit cards, etc. It's one factor generally considered when calculating your credit scores, although the weight it's given may vary depending on the credit scoring model (ways of calculating credit scores) used.