Your “credit mix” makes up only 10% of your FICO® Score, but if you’re looking to have an exceptional credit score, having several different types of accounts could be important.
What is “credit mix”?
The types of credit you have, known as a credit mix, come in many shapes and sizes. Here are some examples so you can see how many you have (or don’t) and if it might be time to diversify your credit mix.
Revolving accounts are those that provide you with credit that allows more flexibility regarding the amount paid monthly (subject to any minimum payments required, and payment due dates, etc.). Some of these include:
- Credit Cards
- Retail Store Cards
- Gas Station Cards
- HELOC (Home Equity Line of Credit)
These types of accounts usually require a fixed payment each month until the balance is paid down in full. A few examples of these are:
- Auto Loan
- Student Loan
Open Lines of Credit
An open line of credit is typically an account with an unspecified amount owed that is to be paid in full on a monthly basis. Examples of open lines of credit can be:
- Cell Phone Bill
- Cable Bill
- Electric/Gas Bill
- Certain Charge Cards
Now that you know what a credit mix is…
What does it mean to you and your FICO® Score? Creditors assess the risk of lending money through a variety of factors, one of them being your ability to successfully manage different types of credit. FICO not only looks at the mix of credit you have but also at the payment history of these credit types. For instance, if you have a great mix of installment and revolving loans, yet your payment history is bad, your FICO Score will reflect that negative payment history (which represents 35% of your FICO Score).
For creditors, it stands to reason that the better you manage different loans and lines of credit, the lower their risk when lending you money.
Again, since credit mix is only 10% of your FICO® Score, it most likely won’t determine whether or not you obtain credit from lenders. However, if you’re striving to bring your FICO® Score to the highest level it can be, your credit mix can play a part.
Planning your credit mix
Okay, so a good credit mix can help (not fully determine) your credit score. Does that mean you should start applying for all the types of credit lines you don’t currently have? Whoa…not so fast.
First and foremost, two things happen when you apply for a number of new credit lines within a short period of time:
- Creditors check your credit (a “hard inquiry”) which typically lowers your credit score and remains on your credit report for two years. (Note: FICO® Scores only consider inquiries made during the 12 months prior to the time the Score is calculated.)
- If a creditor sees you’ve opened an inordinate amount of new accounts within a small timeframe, it could indicate to them that you’re experiencing financial distress, whether true or not. The result? A likely denial of the loan.
Therefore, if you want to add something to your credit mix that’s currently missing, balance the risk versus the reward. Is it worth a drop in your score to apply for a small loan to show creditors you can manage payments successfully? With credit mix being such a small percentage of your credit score, the answer is, “probably not”. However, in the end, the final decision is yours.
Check out myFICO forums and see what other myFICO members are saying about their credit mix and how it works to their advantage (or disadvantage)!