When it comes to credit scores, payment history and credit utilization seem to grab the headlines. This is somewhat understandable, since the combination makes up the lion’s share of your FICO score (65 percent).
Let’s dive into that last, seemingly lowly, category and see what it means and how you can make it work for you.
What is credit mix, and how does it affect your score?
As noted above, 10 percent of your total FICO score comes from your credit mix. In the VantageScore model, age of credit and credit mix are combined to make up 20 percent or 21 percent of your total score, depending on the score version. But either way, this factor is more important in the VantageScore model, at least as far as the breakdown of components go.
Simply put, credit mix means the various types of credit accounts you own. You may ask, what difference does it make? As long as I pay my bill on time, who cares? The main reason that mix matters at all is because the scoring elves at FICO and VantageScore have noticed that making a fixed payment each month is more challenging than being able to vary the payment to fit your current state of financial crisis. Showing that you can meet a fixed financial obligation therefore indicates you are a lower risk borrower and gets you some extra points.
For the record, there are actually four types of accounts: open accounts, charge accounts, revolving accounts and installment accounts. Open accounts are a mix of installment and revolving credit. The payment is not the same each month, but it’s usually due in full at the end of each billing cycle. So you can’t choose how much to pay. Your electric bill is an example of an open account.
Charge cards are also considered open accounts. These cards look and feel like credit cards, but you have to pay the balance in full by the end of each month. Some American Express cards are examples of charge cards, as opposed to credit cards.
All other accounts are one of two types—either revolving or installment. Revolving accounts are your credit cards and lines of credit you have access to that do not have a fixed monthly payment. Your balance determines your minimum payment due each month and there is no set end date to your agreement. Installment accounts include mortgages, auto loans and student loans. These accounts have a fixed monthly payment and they are for a set period of time. Your credit score will benefit most when you have a healthy “mix” of both types, revolving and installment.
This concept is sometimes hard for people who have a bunch of credit cards to fathom; they simply don’t understand why their score is not higher. After all, the reasoning may go, they have the best cards—maybe even the hardest ones to qualify for, and they pay on time each month—and yet their score is not where they think it should be. Oftentimes, the culprit is no or limited credit mix in their portfolio.
Just like nearly every other factor, where you are on the credit score scale will in large part determine how much your credit mix—or more specifically, the lack thereof—will affect your credit score. If you have a well-established or relatively “fat” file, this factor may be icing on your credit cake. But if your file is “thin” (you are new to credit or other factors), the effect can be more pronounced.
What are the different credit types?
Again, as noted above, all credit falls under one of four categories. Credit cards are the most numerous in the revolving credit world, and certainly the easiest to reach for as a remedy if you need to buy something online or on credit. Retail and gas cards, in particular, are relatively easy to qualify for and are often the first choice for consumers new to credit.
Secured credit cards are another good option for those just starting out (or starting over) or worried about getting over their heads in debt. Backed by your own funds, these cards carry the benefit of helping your credit mix without the worry of accumulating debt.
Installment credit can be a little trickier to obtain, usually carrying stricter underwriting requirements. However, you don’t have to take out a mortgage to get some installment credit on to your credit reports. Passbook loans function much like secured credit cards, being backed by your funds.
A personal installment loan can also help you twice if you move high interest credit card debt to a personal loan. You’ll lower your utilization rate (installment loans are expected to have a high balance) while improving your mix. Making regular monthly payments to “pay back” your loan will serve to put a check in the installment credit box on your credit reports.
A note of caution, though, in regards to both secured credit cards and passbook loans. Before you sign up for either, be sure that they will be reported to the credit bureaus. They won’t help your score if they are not.
What’s a good credit mix?
I don’t believe you need a fistful of credit cards, a mortgage and a car loan to enjoy the benefits of a good credit score. One or two credit cards, perhaps even one of today’s best credit cards, and maybe the same in the installment credit category will afford you the benefits of this portion of your credit score.
The bottom line is finding a “healthy mix” for your credit score, meaning a mix you can handle without putting an undue strain on your monthly budget. Your score is made up of other components, after all. Making your payments on time, watching your credit utilization, applying for new credit only when you need to and having a mix of revolving and installment credit are the keys to getting to the credit score you want.