Your FICO® credit score is made up of five factors: payment history, credit utilization, length of credit history, new credit accounts, and credit mix.
Understanding these factors and why they matter to lenders is a foundational step to maintaining an excellent credit score. When you know what factors impact your credit score, you can make smarter credit decisions and begin working towards a higher credit score.
While the other 4 factors are just as important to your credit score, let’s talk about that final credit score factor: your credit mix. Including the following topics:
- What is your credit mix?
- Why does credit account diversity matter to lenders?
- What’s not included in your credit mix?
- How does your credit mix impact your credit score?
- How to optimize your credit mix
- Should you worry about your credit mix?
What is Your Credit Mix?
Your credit mix measures how many different types of credit accounts you have on your credit report. In general, lenders prefer to see that you have a diverse credit mix because it shows that you are able to responsibly manage different types of accounts.
There are two main types of credit accounts:
Revolving credit accounts
Examples: credit cards and home equity lines of credit (HELOCs).
Revolving credit accounts allow you to borrow money as needed up to a certain amount. This amount is known as your credit limit. Once you spend up to your credit limit, you’ll have to pay down some debt before you can borrow any more money.
To stay in good standing with your lender, you’ll be required to make a minimum payment on your revolving credit account’s balance each month. You can either carry the rest of your balance over to the next month, make a slightly larger payment, or pay off your entire balance in full. In most cases, if you fail to pay off the full balance, you will pay interest on the remaining amount. However, if you choose to pay off your entire balance each month, you probably won’t need to pay any interest.
Revolving credit accounts can usually be used indefinitely until you or your lender decide to close the account.
Installment credit accounts
Examples: auto loans, student loans, personal loans, home equity loans, and mortgage loans.
Installment credit accounts let you borrow a specific amount of money all at once. You must pay back this money gradually over time by a predetermined date. The sum of money you borrow is known as the principal. You’ll be required to repay the principal and its interest in the form of monthly installments. If your interest rate is fixed, these payments will most likely be the same amount each month. Once an installment loan is paid off in full, the account will be closed automatically. If you want to borrow more money, you’ll need to apply for another installment loan.
What’s Not Included in Your Credit Mix?
There are two types of credit accounts that aren’t included in your credit mix: payday loans and title loans.
Why is this? Well, payday loan and title loan providers usually don’t report your credit activity to the credit bureaus. As a result, these credit accounts won’t show up on your credit report. Since your credit score is based solely on the data shown within your credit report, there’s no way to factor in these credit accounts.
Note: Even though payday loans and title loans don’t get reported to the credit bureaus, providers of these loans can still sell your debt to a collection agency if you default on your payments. Once your missed payment has gone to collections, it can get listed on your credit report. Unfortunately, your payday loan or title loan won’t benefit your credit mix at this point. Instead, your missed payment will harm your payment history.
How Credit Mix Impacts Your Credit Score
Different credit scoring models weigh credit mix differently. With the FICO credit scoring model (which is used by 90% of lenders), this factor makes up 10% of your credit score.1
FICO credit scores can range from 300 to 850 points. This means that you can earn a total of 550 points. Since your credit mix only makes up 10% of your credit score, it can only impact around 55 of those points.
For reference, these are the other FICO credit score factors and their respective percentages:2
- Payment history — 35% (or roughly 192 points)
- Credit utilization — 30% (or roughly 165 points)
- Length of credit history — 15% (or roughly 82 points)
- New credit accounts — 10% (or roughly 55 points)
Based on these numbers, you can still earn a very high credit score without diversifying your credit mix. You may even be able to get it up to 800. Even so, understanding how to optimize your credit mix is useful, especially if you want to earn the highest credit score you can.
Why Does Credit Account Diversity Matter to Lenders?
As you can see, these two types of credit accounts work differently from one another. Even if you have experience using a revolving credit account, you won’t necessarily know how to manage an installment credit account and vise versa.
In this sense, it’s like knowing how to play soccer, but not having any experience playing tennis. A tennis coach won’t have much confidence in your tennis skills just because you’ve played soccer before. If you want to show them that you’re great at tennis too, you’ll need to get some direct experience that proves it.
Lenders value a diverse credit mix for the very same reason. A diverse credit mix shows lenders that you’re a well-rounded credit user. In turn, you’re more likely to manage all types of credit accounts properly and responsibly.
How to Optimize Your Credit Mix
If you’ve already been making all your payments on time and keeping your credit utilization in check, the next credit score factor to improve is your credit mix. So what can you do to optimize this factor?
Lenders want to see that you can successfully manage different types of credit accounts. In turn, having a mortgage loan, an auto loan, a personal loan, and a few credit cards is better than just having credit cards, as long as you can manage them responsibly.
However, you shouldn’t open new types of credit accounts solely to diversify your credit mix, especially if you can’t afford to pay them back on time. Instead, focus on the following tactics:
- Avoid closing old credit card accounts — While installment loans are closed as soon as you pay them off, credit card accounts can stay open for as long as you want. You just need to keep your credit card account in good standing. Keeping your old credit card accounts open can help you preserve your credit mix. It can also help you maintain a longer length of credit history and lower credit utilization, both of which can improve your credit score even more.
- Open new types of credit accounts as needed — While you shouldn’t open new credit accounts just to improve your credit mix, don’t be afraid to take advantage of affordable financing when it truly comes in handy.
For example, you may want to consider applying for a personal loan or home equity loan if you have to pay for some unexpected expenses, rather than using your credit card. Or, if you’re ready to buy a new car or house, you can explore your auto loan and mortgage loan options. Using new types of credit accounts when it’s appropriate is the best way to diversify your credit mix.
Don’t Lose Sight of Other Credit Score Factors
While optimizing your credit mix is a worthwhile endeavor, it’s important to keep your credit mix in perspective. Some actions may reduce your credit mix but benefit your payment history or credit utilization.
For example, paying off your mortgage can reduce your credit mix. However, it’s still the most responsible thing you can do for your payment history. Likewise, closing a credit card with costly annual fees may reduce your credit mix, but it may still be the right financial decision in the long run.
As you can see, your credit mix is only one financial factor to consider. Since it has less of an impact on your credit score than your payment history, credit utilization, or length of credit history, you shouldn’t stress about it too much.
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1FICO. The Score the Lenders Use.
2FICO. How are FICO Scores Calculated?