What Is Credit Mix?

Your credit mix plays an important role in how your credit score is calculated, but how exactly does it work? Let’s take a closer look at what credit mix means and why it matters for your financial well-being.

• Definition of Credit Mix

   

  Credit mix refers to the different types of credit accounts that you have access to, namely revolving credit and installment loans. Revolving credit accounts are accounts that you can continuously borrow and repay, like credit cards and home equity lines of credit (HELOCs).¹ Installment credit refers to loans you take out as a lump sum and repay over time, including personal loans, mortgages, auto loans, and student loans.² If you have a credit card and a student loan, it shows you manage two different types of credit, which counts toward your credit mix.

   

  Why Does Credit Mix Matter?

   

  Managing different types of credit can demonstrate more well-rounded borrowing habits, which may reassure lenders. For instance, if you only have a credit card, you may be accustomed to continuously borrowing and repaying funds, but not taking out a lump-sum auto loan that requires repayment over a set period of time. Demonstrating responsible management of both types of loans shows your ability to handle different types of debt.

If you don’t have more than one type of credit account, don’t stress too much. Credit mix typically amounts to about 10% of your overall FICO credit score, for instance, whereas your repayment history and credit utilization account for 35% and 30%, respectively.³ That means that, while managing multiple types of credit accounts impacts your score, your ability to use your accounts responsibly is more important.

A balanced credit mix may include both a revolving credit account and an installment loan, such as a credit card and a mortgage. Just remember that it’s even more important to stay on top of both accounts. Likewise, it may not be worth opening a new account solely to diversify your credit mix. Mismanagement could have substantial negative impacts on your credit score. Plus, applying for new credit accounts requires a lender to make a hard inquiry to view your credit report, which can temporarily lower your credit score a bit.⁴

You want your lines of credit to help you achieve your overarching goals, and increasing your credit mix alone likely won’t increase your score enough to change your financial outlook. If you have just one credit account right now, you may want to focus on making on-time payments and keeping balances low and wait until you’re in a position where a second type of credit makes sense, like the opportunity to buy a car with an auto loan.

By using online tools to monitor your credit score, you can see areas where you can improve your borrowing habits and make adjustments to raise your credit score over time. Plus, you may see how your current credit mix affects your score and how it could improve when the time is right to add another type of credit to your name.