How a good credit mix can improve your score
Your parents warned you about all the missteps they made at the start of their credit journey. Whether it’s coping with foreclosure on their first home or racking up hundreds of dollars in late fees at the power company, their credit score was not always the rosy image of a stable home that it is today.
So you’ve spent the past decade religiously paying every bill on time, paying off your student loans, and paying off your car. But you still can’t seem to get your credit score as high as theirs, even though you’ve never even pulled out a credit card. Turns out that might be the problem.
When lenders check your credit, they’re looking for more than just a history of bills being paid promptly. A small but potentially significant part of your credit score is your credit composition. And for some borrowers, it can mean the difference between good and great credit.
How a good credit mix can improve your score
Credit allocation receives little attention in the grand scheme of credit score discussions. And there is a reason for that. Although its importance varies from FICO to Vantage, it still only accounts for about 10% of your credit score.
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But for many borrowers, it’s still an integral part of improving overall creditworthiness. It’s also one of the easiest factors to control, so it deserves your full attention (check Apple Watch), no matter how long it takes you to finish reading this article.
What is a credit mix, anyway?
Your credit mix is the combination of different types of credit in your credit history. The credit bureaus, which track and calculate your credit score, consider a few main types of credit.
- Installment credit. Installment credit is usually tied to a large one-time purchase that you pay off in installments, usually roughly equal amounts each month. Examples include auto loans, student loans, personal loans, and mortgages.
- Revolving credit. Revolving credit is an open credit that you can subscribe to at any time within the limit of a predetermined amount. Monthly payment amounts depend in part on how much credit you’ve used. Credit cards and home equity lines of credit are common examples. Once you have paid off all the debt, you can borrow it again until you close the account without reapplying.
- Open accounts. Accounts that you pay in full each month, such as credit card, are open accounts. Some offices may consider accounts in open collection accounts because you owe the overdue amount at this time. Note that utilities are also open accounts. You may not think of them as a credit, but electricity, water, and even internet providers trust you to pay your bill every month after you provide service. Surely they will cut your service right away if you don’t pay. But they also report it to the credit bureaus.
Some would say that your mortgage is a separate type of credit because on its own it can have a huge impact on your credit score, at least when you first get it. But that’s mainly when it counts in your payment history or usage. As part of your credit mix, this usually only counts as installment credit – lots of installment credit.
Also note that bureaus do not factor your utility bills into your credit mix. They usually only appear on your credit report if you haven’t paid them. Experian Boost allows you to directly enter your utilities to receive credit for on-time payments. But even that doesn’t affect your credit mix. Credit opened in the form of delinquent accounts counts.
Utilities aren’t the only debt that only matters if you don’t pay them. Offices are generally not informed medical debt or title and payday loans unless you are a delinquent. Regulations prevent certain medical debts from appearing on your account. Not so much with title and payday loans.
What is a “healthy” credit mix?
There really isn’t a magic ratio when it comes to a healthy credit mix. And even if there were, the credit bureaus don’t share the details. They are mainly looking to see if you can effectively manage different types of debt.
As such, a healthy credit mix is installment and revolving credit and free of negative entries like late payments or defaults. In a perfect world, you won’t have any open credit on your report (unless it’s from Experian Boost) as these usually represent credit missteps.
How a healthy credit mix can improve your score
Overall, if your debt philosophy is something like “pay at least what you owe each month,” you should be fine. But having a healthy credit mix can certainly boost your score, potentially from good to excellent. The amount depends on how your credit looks at the moment.
If you’re just starting out, focus on getting it right. Build your new credit history carefully and thoughtfully, knowing that credit allocation is only one piece of the puzzle. At this point, your short credit history is hurting you more than your credit mix. It just takes time and responsible use of credit. Get at least a decade of credit history under your belt before you worry about compounding.
If you have a score lower than 670 or 680, it is more important to rebuild your credit globally. Focus on things like paying off debts in collection, paying on time each month, and reducing your credit usage if necessary. These things make up well over half of your credit score and can cost you tens of thousands of dollars on something like a 30-year fixed mortgage.
If you have good to excellent credit, diversifying your credit mix could improve the terms of your next loan, depending on how your score increases. But don’t expect miracles.
If it takes you from good to great, it could have a pretty big impact. But if it takes you from good to even better or excellent to who that masked man was, it may not make a real difference if you still land in the same base category for the lender.
It also makes a more significant difference on larger loans, where you can save thousands of dollars, than on smaller loans.
Still, if you switch from a 680 to a 700 or a 750 to a 780, you may be able to save several thousand dollars over the life of a mortgage.
How to improve your credit mix
Improving your credit mix is simple. If you lack a type of credit, you must obtain that type of credit. If you’re short on installment credit and need a new car, you’re in luck. But most of the time the reason you lack one or the other is because you don’t need them right now.
And if your instinct is to be nervous about taking out credit you don’t need, hang on to that. This will save you from turning a credit enhancement mission into a money pit. Keep the amount low enough so you don’t get in trouble. You don’t need $20,000 in debt to prove you can manage your debt.
If you’re worried about revolving credit, it’s relatively easy to deal with. You just need a credit card that you can pay off in full each month.
My mom used to pay all her bills with her Discover card, write a payment to Discover each month, and then cash out the rewards. You can do something similar with a credit card with cash back Where travel rewards card. Or get a card for a store you shop at frequently, like the Target RED card Where Amazon Prime Rewards Card. If you really don’t want to take out credit you don’t need, try a secure credit card.
If it’s an installment loan you need, it’s a bit trickier. You certainly don’t want to buy a house or a car just to boost your credit score a few points.
But that doesn’t mean you can’t pull off a little Personal loan. It’s usually best if it’s for something you already need – in fact, the bank may have rules that require it. For example, you could take out a loan to pay for a family vacation you are already planning.
You can even take out a personal loan to pay off your credit card debt. Just don’t take out a loan with a higher interest rate than the debt you’re paying off.
Using your credit mix to boost your credit score is best for those who already have good or excellent credit. And even then, you should only do this to completely minimize the amount of interest you have to pay if you take out a large loan like a mortgage or car loan. Raising your score by a few points could save you hundreds or thousands of dollars, depending on how much you borrow and how much you raise your score.
Everyone should look to others ways to improve their credit.