There’s more than one type of credit. That’s important to know not just from a borrowing standpoint, but also in terms of your credit score. Part of your FICO credit score is measured based on your credit mix—the different types of credit you have in your name. When you have a variety of credit types, your score usually benefits.
Here’s what you need to know about FICO credit mix and how you can use it to improve your credit score.
Why Does Credit Mix Matter?
There are a lot of things that factor into your credit score, with credit mix being one of them. Mix usually accounts for 10% of your credit score. That might not seem like much, but if you are lacking in one of the other areas—payment history, credit utilization, or length of credit history — having a strong credit mix could help you earn a better score.
Having a varied credit mix shows lenders that you are capable of handling different types of credit and loans. It also shows that you’ve been approved by other lenders for various types of credit accounts, which may help your creditworthiness.
How Credit Mix Helps Your Credit Score
The saying “Don’t put all your eggs in one basket” applies to lots of things in life: your investments, income sources, and your credit score.
When it comes to building a good credit score, every little bit helps. While credit mix doesn’t carry a lot of weight, it does mean something. And when you focus on all the different parts of your credit score, you stand a better chance of earning a higher score.
What Types of Credit Make Up Your Credit Mix?
Ready to start focusing on a stronger credit mix? Here are some credit types that make a difference.
Installment Credit
Installment credit is one of two types of credit that influence your credit mix. This is where you have a fixed amount of money borrowed and you make “installment” payments until it’s repaid. Think of car loans, mortgages, or a large purchase you finance through the store you bought it from, for example.
These payments are usually fixed amounts. There is a determined end date and you usually pay the same amount each month.
Revolving Credit
Unlike installment credit, where you have a set payment each month and an end date, revolving credit doesn’t have specific parameters. You might have a credit limit and can “charge” up to that limit, then make a minimum payment each month. If you choose, you can pay more than the minimum each month to free up some of your credit limit.
Credit cards are the perfect example of revolving credit. A home equity line of credit (HELOC) is another prime example, as well as business credit accounts you might have with certain vendors.
When considering your credit mix, your credit score will usually improve if you have both installment credit and revolving credit accounts. An example of this would be having a mortgage, a credit card, and a car loan all at the same time.
If you only have one type of credit account, such as a credit card, it can be beneficial to your credit score if you take out a small personal loan or a secured loan. Borrow what you know you can pay back without issue. This gives you a chance to demonstrate that you can handle different types of credit accounts.
What Types of Credit Don’t Count in Your Credit Mix?
Not all types of loans or credit factor into your credit mix. For instance, payday loans and title loans will not positively affect your credit mix, even if you do repay those loans on time. That's because these lenders do not report your timely payments to the credit bureaus.
However, they will report you if you are delinquent on a payment. They will usually sell delinquent loans to collection agencies, which will show up on your credit report.
What to Do Next
If you only have revolving credit or only installment credit, you might not see a huge impact on your credit score. If you are repaying your loans on time, have a long credit history, and are not fully utilizing all credit available to you, then credit mix will not have a drastic effect. Remember, credit mix only accounts for about 10% of your FICO score.
However, if you feel that your credit score is suffering in other areas, then improving your credit mix might give you a boost in the right direction. If you need to add another type of credit to your name, make sure you’re only using as much credit as you can repay. This helps you avoid interest fees, plus it ensures your account doesn’t become delinquent due to non-repayment.
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