At a Glance
Credit mix refers to the types of credit accounts you have under your name. Having a diverse credit mix can showcase your ability to handle different kinds of financial responsibilities, which ultimately works in your favor to boost your credit score. So, whether you’re a student just starting to build credit or a seasoned borrower looking to improve your credit score, consider diversifying your credit mix to achieve better financial health.
In this article, you’ll learn:
million people in the U.S. do not have credit scores, which means they likely don’t have any form of credit account.
What is credit mix?
Credit mix is the variety of types of credit accounts that a person has. It’s one of the factors that lenders consider when assessing a borrower’s creditworthiness and typically includes different types of credit, like credit cards, installment loans, mortgages, and car loans.
How does credit mix affect your credit score?
Credit mix can impact your credit score, as it is one of the factors that is considered when assessing your creditworthiness. While the exact weight of credit mix on your score varies by scoring model, having a mix of different credit accounts is generally viewed as positive and can help boost your score.
Credit mix is just one factor that affects your credit score, and its impact will depend on your overall credit profile. Payment history and credit utilization are generally considered more important factors in determining your credit score, so it’s important to prioritize making on-time payments and keeping your credit card balances low as well.
What are the different types of credit?
There are several types of credit that people can use to borrow money or finance purchases. Here are some of the most common types of credit:
- Revolving credit allows you to borrow money up to a specific credit limit. Credit cards are a common example of revolving credit. With revolving credit, you can borrow money repeatedly up to your credit limit, and you are only required to make minimum monthly payments.
- Installment credit is when you borrow a fixed amount of money, which you then pay back in installments over a set period. Car loans and mortgages are common examples of this type of credit. With installment credit, you make a fixed monthly payment until the loan is paid off.
- Secured credit is backed by collateral, like a car or a house. If you fail to repay the loan, the lender can seize the collateral to recoup their losses. Car loans and mortgages are also often secured credit.
- Unsecured credit is not backed by collateral, so the lender relies solely on your creditworthiness to determine whether or not to lend you money. This is typically the case for many credit cards and personal loans.
- Open credit is a pre-approved loan between a lender and a borrower and the borrower can use it repeatedly up to a certain limit, without needing to reapply for a new loan or credit repeatedly. Interest is only charged on the amount borrowed and the borrower can pay as often as they want but they must make the minimum payments on time each month. Examples of open credit are credit cards, HELOCs, and business lines of credit.
What is not included in your credit mix?
Not all types of credit are included in your credit mix. For example, certain types of credit or loans may not be reported to credit bureaus and, therefore, would not factor into your credit score. Here are some types of credit that may not be included in your credit mix:
- Payday loans: These are typically short-term loans that are meant to be repaid on your next payday. Payday loans are often not reported to credit bureaus and are generally considered a high-cost form of credit.
- Rent payments: While some rent reporting services may report rent payments to credit bureaus, rent payments are not traditionally included in your credit report or credit score.
- Utility payments: Your utility payments, like gas, water, and electric bills, are generally not included in your credit report or credit score, although they may be reported to credit bureaus if you fall behind on payments.
- Insurance payments: Your payments for car insurance, health insurance, or homeowners insurance are generally not included in your credit score, although they may be reported to credit bureaus if you fall behind on payments.
What is a good credit mix?
There’s no one “perfect” credit mix. Having a mix of credit accounts that you can manage responsibly is generally considered favorable. For example, you might have a mix of credit accounts that includes a credit card, a car loan, and a mortgage.
Why do lenders like a variety of credit?
Lenders like to see a variety of credit because it shows that a borrower has experience managing different credit accounts. This indicates that the borrower has diverse financial obligations and has demonstrated the ability to manage them responsibly.
Having a mix of credit accounts can also indicate stability and financial responsibility. For example, if a borrower has a mix of credit accounts that they have managed well over time, this can signal to lenders that they are less risky to lend to.
Additionally, a diverse credit mix can provide lenders with a more complete picture of a borrower’s creditworthiness, which can help lenders make more informed lending decisions and offer better terms and interest rates to borrowers with a proven track record of managing a variety of credit accounts.
On the other hand, if you have a limited credit mix and only have one type of credit account, like only credit cards, it can show that you have less experience managing different types of credit, which may make lenders view you as a higher risk borrower, which can negatively impact your credit score.
How to know your credit mix?
To know your credit mix, you can obtain a copy of your credit report from one or all of the three major credit bureaus, Equifax, Experian, and TransUnion. Your credit report will show all of your open credit accounts.
Reviewing your credit report can give you a good sense of your credit mix and whether you have a diverse range of credit accounts. Make sure to check for any errors or inaccuracies in your report that could affect your credit score.
You can also use a credit monitoring service or credit score provider to track your credit mix and receive alerts if your credit mix changes over time. Some credit monitoring services and credit score providers offer personalized recommendations for improving your credit mix based on your individual financial situation.
Not having a good credit mix may hurt your credit score to some extent, but it’s not necessarily a deal-breaker. Credit mix is just one of many factors contributing to your credit score, and its impact may vary depending on your overall credit profile.
If you have a limited credit history or have only used one type of credit, you may have a lower credit score than someone with a diverse credit mix. However, having a strong payment history, low credit utilization, and long credit history may outweigh the impact of having a limited credit mix. Additionally, if you’re just starting out with credit or have recently paid off a major debt, like a mortgage or car loan, your credit mix may be temporarily limited, but this is not necessarily a reflection of your creditworthiness.
While having a diverse credit mix can demonstrate your ability to handle a variety of financial obligations, it’s not enough on its own to guarantee a good credit score. You also need to make sure that you make payments on time, avoid taking on too much debt, and maintain a low credit utilization ratio.
Having multiple credit cards can potentially improve your credit mix if you also have other types of credit accounts, like loans or a mortgage. A mix of credit accounts can show lenders that you have experience managing different types of credit, which can be beneficial for your credit score.
However, if you only have credit cards and no other types of credit, having multiple credit cards may not significantly improve your credit mix. In fact, having too many credit cards can potentially lower your credit score if you’re not using them responsibly or if you’re carrying high balances.