You probably heard of the saying “diversity is the spice of life.” The FICO scorekeepers sure seem to follow that advice. They believe that having a balanced approach to debt and finance is an important one. Like a well-balanced meal or a diverse investment portfolio, your credit diversity contributes to a portion of the FICO credit score. Although the credit mix comprises 10% of your score, it’s still an important part of your score.
What is Credit Mix?
Credit Mix is a representation of the types of loans and debts that you’re responsible for. This could include debt instruments like mortgage loans, credit card debt, and student loans. And the mix tells creditors that you have a diversified mix of credit loans.
Why is a credit mix important to lenders? A well diversified holding of debt shows that you’re responsible with debt because varied debt shows that you can deal with paying off multiple types of sources. If you’re a lender and see a borrower only have credit card debt, you would want to know if that person can handle other types of debt, right?
Good Credit Mix
Good credit mix is where you are in the varied types of credits based on the three major credit agencies (Experian, TransUnion, and Equifax). The most common types of credit may be the following:
Installment Loans refers to a specific amount of debt paid over a period of time. The consumer cannot borrow up to a certain limit like you can with a credit card. Popular examples include student loans and mortgage.
Revolving credit provides access to credit up to a specified maximum amount. Although there is a limit to the credit, you don’t need to completely draw money from the account. Once you reach the limit, a user can’t simply borrow more money. Common examples are credit cards, retail credit, home equity line, and personal line of credit.
Other Types of Debt
The other types of loans are unpaid loan amounts from collection agencies and open credit. Open credit types are a bit uncommon, but they are credit that allows you to borrow up to a limited amount, but the credit card holder must pay the entire balance in full by a specified time. American Express issues charge cards in the form of open credit.
Credit Utilization Strategy
Clearly, if you’re a person with one type of credit, you may want to consider branching out to other types of credit. For example, someone with just credit cards might want to want to consider, say, a mortgage or a personal line of credit.
Keep in mind that getting new credit might put a ding to your credit in the short run. This is because most creditors do a hard inquiry to determine your credit score. It’s important to plan out your application process and determine what you want to do in the long run. Too many new credits might tempt you to spend more money, so think about your intentions and goals with the new credit.
Another important strategy is keeping your account open even if you have no interest in keeping the debt alive. Particularly with credit cards, you may want to keep them open because it might affect the overall credit utilization and it might affect your mix if you don’t have another credit card. By keeping at least one open you might be able to improve your score as you get other debt instruments.
Credit mix is still an important part of your overall credit score because it tells the lenders that you’re an experienced and responsible borrower. By understanding the types of credit, you can find out if you’re diversified enough to raise your credit mix points. Plan accordingly and find out what your next credit might be and see if it helps improve your credit mix.