Credit Mix How it Impacts Your Credit Score

What is a Credit Mix?

Credit mix makes up ten percent of your overall credit score, and it comprises a combination of different credit trade accounts. Having only credit cards will indeed help you to build a good credit history, but it doesn’t tell a complete story to financial institutions. Banks like to see a full, varied mix of credit accounts. Furthermore, having a credit mix of different accounts on your credit report is a comprehensive and more complete record of your financial habits.

What Is a Revolving Account?

A revolving credit account is basically lines of credit that remain open and from which the consumer can use at any time as long as they do not exceed the credit limit granted.

Types of Revolving Credit

  • Credit Cards from a Bank or Credit Union
  • Retail Store Credit Cards
  • Gas Cards, Issued by an Oil Company
  • Home Equity Lines of Credit

What Is an Installment Account?

An installment loan is a loan for a specified period. The payments are the same for each month and have the interest incorporated along with the principal into the payment.

Types of Installment Accounts

  • Mortgage Loans
  • Auto Loans
  • Student Loans
  • Home Equity Loans
  • Signature Loans

What Is an Open Account?

Open accounts are bills that appear occur monthly such as utility and cell phone bills. Open accounts can also be charge accounts. Charge accounts require payment in full each month.

Types of Open Accounts

  • Charge Cards – such as American Express® Green Card
  • Utility Bills – electric, gas, cell phone bill

What Is a Credit Tradeline?

A tradeline is any of the account types listed above that appear on your credit report. Please note that not all open accounts report on your credit report. A charge card from American Express will, while utility bills may not. The only way to know is to look at a copy of your credit report.

Credit Mix Installment and Revolving Lines of Credit

Why Does Credit Mix Matter?

Credit mix matters because it shows credit bureaus and banks how you can handle a broad mix of different credit trade accounts. Credit mix helps when applying for a mortgage because it shows a bank a wide range of patterns you have about your money and financial management skills. If you only have one credit card, with a five hundred dollar credit limit for one year it does not say much whether you would be a safe bet on paying a mortgage payment every month.

What is a good credit mix to start?

Have no credit or just starting? A good credit mix would be three revolving credit cards and one installment account such as an auto loan. If you are older with a more established credit history, you may not have to do much. Try to maintain these credit accounts as long as possible because credit age does matter with building good credit. If you lack an installment trade account for some time, you could think about getting a small loan of $500 -$1,000, that you pay back in twelve months.

I would only consider a small installment loan with a bank if you plan to buy a home. Do this only if the small loan is paid off at least two months before you start applying and your credit file is being pulled. You want it to be two months so that the credit bureaus have time to update the account as paid in full.

Most of these types of loans allow you to pay off the total amount early without penalty. Please remember while focusing on credit mix is great you want as little debt as possible to appear in regards to your credit utilization (which makes up 30% of your credit score) when trying to get approved for a mortgage. Maybe you will get approved, but perhaps at a higher rate of interest. Your rate of interest matters when you have 30 years of interest compounding on your principle.

Remember that credit mix may seem like a small portion of your overall credit file, but it will impact your credit score. There is a real benefit to having a combination of trade accounts. Credit mix can help to secure loans with a better rate of interest, and that will save you money in the long run.

Monica Kowollik

Director at CreditFast.com
Monica has covered credit card and personal finance news for over 15 years. From an early age, she developed an interest in financial literacy and saving money. Monica hopes to help others to improve their personal finances one article at a time.

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