In this article:
The saying "don't put all your eggs in one basket" has endured for a reason. Balance is an important part of a healthy financial life, and most financially secure consumers take an even-handed approach to managing their money.
For instance, you want a diversified blend of investments to make up your financial portfolio. You also want a nice mix of savings goals and budgeting priorities to guide your spending habits. In retirement, you want multiple sources of income rather than having to rely on Social Security alone. It's about maximizing the potential for growth and minimizing risk.
Mixing it up is just as important—but often overlooked—when it comes to credit. Commonly used FICO® Scores count your mix of credit as 10% of your overall score. So what is credit mix? It's the variety of loans in your credit file—and, where your credit scores are concerned, how well you manage that blend. Ignoring it can drag down your credit score, while understanding and improving it can give you a boost.
Here's what you need to know about how credit mix works.
How Can Credit Mix Help Your Credit Score?
Multiple factors determine your credit score, and two main credit scoring models—FICO® and VantageScore®—have similar criteria in calculating those scores.
In general, there are four main categories that impact your credit. The most influential factor is payment history, which makes up 35% of a FICO® credit score. If you make your debt payments on time every month, your credit scores will likely improve.
When you miss a payment, the lender may report it as late. Because the credit scoring models put so much weight on payment history, this could seriously impact your scores. That doesn't mean you have to pay off your balance in full every month (though it certainly doesn't hurt). Even paying the minimum or just a portion of your balance—on time—will have a positive effect.
Credit utilization is the next biggest component, making up 30% of your credit score. Your credit utilization rate is based on how much of your available credit is being used, and only considers revolving credit such as credit cards. Low credit utilization signals that you're a responsible borrower, whereas high utilization indicates an unhealthy reliance on credit to fund your lifestyle.
Ideally, you should keep your credit utilization rate below 30% overall and on each individual credit card. To calculate your utilization, determine your total available credit and multiply it by 30%. Stay below that number or risk hurting your credit scores.
The third most important factor is the length of credit history, which is the average age of all your credit accounts. These are counted from the date you opened the account and include only currently active loans or lines of credit.
A high credit age reflects well on your credit report, while a young one may drag down your scores. While you can't change these numbers overnight, paying your bills on time over months and years will help you as your credit history lengthens.
The final component of a credit score is the credit mix, determined by how many different types of revolving and installment credit you have (see below). Credit mix counts for 10% of a person's FICO® credit score.
Maintaining a mix of credit demonstrates that you can handle multiple types of loans. Along with the other elements above, improving your credit mix can help you reach excellent credit score status.
Be aware, however: Filing for bankruptcy, having a debt go to collections and being evicted will also be reported on your credit report and will negatively affect your credit scores.
What Are the Different Credit Types?
There are two kinds of credit: revolving and installment.
Installment credit has a fixed end date with a series of payments due every month. Installment loans include mortgages, student loans, auto loans, and personal loans.
Revolving credit doesn't have a specific end date or set balance. Instead of spacing out the balance equally over a certain length of time, a minimum payment is due each month. Consumers can choose to pay more than the minimum but are not required to. Credit cards are the most common type of revolving credit. A home equity line of credit (HELOC) is another type.
There are two types of credit cards: bank cards and retail cards. Bank cards are issued by banks, while retail cards are from brick-and-mortar and online stores. Retail cards often come with higher interest rates and sneaky fine print, so be sure you are familiar with all the details before using a retail card.
An ideal credit mix includes a blend of revolving and installment credit. An easy way to use revolving credit is to open a credit card—and pay your bill on time every month. Ideally, charge only what you can pay off every month to avoid interest. If you don't have an installment loan and only have credit cards, consider opening a small personal loan or other types of secured loan. This will demonstrate your ability to manage different types of credit.
What Isn't Part of Credit Mix?
Two of the most common types of loans that don't count toward credit mix are payday loans and title loans. Lenders who provide payday and title loans don't report them to credit bureaus, so they won't impact your credit scores or show up on your credit report. Even if you repay a payday loan on time every month, it won't factor into your credit report.
The only catch is if you default on a payday loan or title loan. In this case, it may be sold to a collection agency, which will then report it on your credit. In other words, payday and title loans can't help your credit, but they can absolutely hurt it.
Does a Lack of Credit Mix Hurt Credit Scores?
If you only have one type of credit in your profile, you shouldn't see a huge impact on your score. You may even still reach the coveted "800 club" without a variety of credit, although it will be more difficult.
If you want to make your credit score as perfect as possible, however, having credit mix will help you get there. Building a financially secure future is a game of inches, so even a portion as small as 10% of your credit score should be taken seriously.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.