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Credit mix is a category that accounts for 10% of your total FICO score. It’s an often overlooked category and probably the least discussed category of your score. While it’s likely the least important factor in determining your score, it’s still beneficial to understand how this category is determined so that you can eventually reap the benefits of having a good credit mix on your credit report.
What is credit mix?
Credit mix looks at how diverse your different credit lines are. There are two major types of credit lines: installment and revolving credit lines. (Also discussed are open lines of credit.)
Installment credit lines
For installment credit lines you usually pay a fixed amount each month until you pay down an entire balance due. Common examples of installment loans are:
- Home loans
- Auto loans
- Student loans
- Personal loans (can often be revolving)
Revolving credit lines
Revolving credit lines offer you a credit limit that you can utilize at whatever pace you want to. Common examples include:
- Credit cards
- Store credit cards (Macys’ card, GAP card, etc.)
- Trade lines (credit line at a jewelry store)
- Personal loans
Open lines of credit
Open lines of credit are credit lines where you’re given an unspecified amount of credit usually on a monthly basis and expected to pay that balance in full each month. Many open lines of credit will not reflect on your personal credit report (unless you miss a payment). Other open lines like charge cards do report on your credit report.
- Charge cards
How much does credit mix affect your credit score?
Your credit score is determined by the following categories:
- Payment History (35%)
- Utilization (30%)
- Credit History (15%)
- New Credit (10%)
- Mixed Credit (10%)
It would appear that mixed credit carries the same weight but according to Creditcards.com, Barry Paperno, a consumer operations manager at myFICO.com stated that, “[f]or the most part, it can be considered the least important of the five main components.” That seems a bit contradictory since new credit is allocated the same 10% as mixed credit but that information is coming straight from an operations manager at myFICO, so it’s safe to say it’s probably accurate.
Why is mixed credit important?
Creditors want to see that you can successfully manage different types of credit. Barry Paperno also stated that “FICO’s research has found that, all things being equal, consumers with a ‘mix’ of credit types on their credit reports tend to be less risky than those who have experience with only one type of credit.”
Presumably, the better you are at managing an array of different credit lines, the more responsible of a borrower you might be. Statistically speaking, this probably is accurate as you can imagine that a typical profile of someone with a mortgage, car loan, student loan, and a couple of credit cards would on average be more stable than someone with only five department store credit cards. Of course a lot of other correlative factors probably come into play here like income and education, but I don’t doubt what the statistics probably show about consumers with mixed credit profiles.
Why is credit mix important to the consumer?
Practically speaking, mixed credit is important because FICO says having a variety of loans is necessary for earning a perfect credit score, according to creditcards.com. Ethan Dornhelm, principal scientist at FICO reiterated that the change in credit score is around “10 to 20 points, not 100,” according to FoxBusiness.
So this category is probably more for the over-achievers seeking perfect or near perfect credit scores. In other words, if you’re just starting to build up your credit or rebuilding your credit, I wouldn’t prioritize diversifying your credit mix. Instead, focus on lowering your utilization and building up your payment history since those things make up 65% of your credit score.
If the credit diversification happens on its own then great, but I wouldn’t go out of my way just to pull out different types of loans for a bump in my score. It’s probably best for most people to just let it happen naturally. Plus, it’s possible that the effect from your credit mix is interrelated to a number of other factors on your credit report like your payment history, utilization, other accounts, etc., so it would likely be difficult to accurately predict what kind of boost you’d receive from taking out a given loan in any event.
How to perfect your credit mix
One interesting quote about the effect of mixed credit comes from Paperno at FICO and states that, “The number of each type of account is not as important for a person’s score as simply having experience with both types of accounts, either currently or within the recent past.”
There are two take-a-ways from this quote for me.
First, it’s important to note that the number of different accounts doesn’t matter much. This makes a lot of sense since a lot of people probably don’t have more than one type of home loan, auto loan, etc.
Second, the quote stresses that what is most important is having experience with “both” types of accounts. That’s important to me since it seems to imply that what’s most important is just having a mixture of both installment loans and revolving credit, since those are the two major different types of credit lines.
Different weight for different types of accounts?
There’s conflicting information on how much having different types of installment and revolving accounts affects your score. Obviously, the quote from Paperno states that the number of each account type isn’t as important as having both types (installment and revolving accounts). But the quote also doesn’t state that having a good mix of different types of installment and revolving credit lines is not important or not considered.
Since FICO doesn’t release exactly how they calculate their credit scores, it’s hard to know exactly how important it is to have a variety of each type of credit line. My guess would be that it’s not very important to your overall score. That’s because the mixed credit category is the least important factor and what’s most important for this factor is merely having both types of credit: installment and revolving.
Thus, if you have a little bit of both revolving credit and installment credit, you probably are reaping the majority of whatever little benefit “mixed credit” is having on your overall score.
Still, some have stated specific guidelines about maintaining a proper mixture of credit. For example, Streetdirectory.com claims that “When it comes to maintaining a good mix of credit, most advisers recommend that you have one loan for every 3 to 5 credit cards.” I don’t exactly know who these advisors are that recommend that but I do think it makes sense that the overall make-up of your mixture of credit is considered to an extent. For example, I could see why a home loan would make you appear more responsible on paper than having an auto loan, since those who obtain home loans probably have a better track record on average than those with just auto loans.
And don’t forget, there’s many different models of your FICO score, some of which are specifically tailored to different industries. It’s very possible that a FICO model designed for the auto industry would give more weight to credit mix that has a history of auto loans and the same with mortgages. Again, that’s speculation on my part but I think that it makes sense.
Overall, establishing your credit mix should not be a major priority since it is the least important factor in your credit score and it’s easy enough to naturally diversify your credit with both installment and revolving credit lines. However, since it could end up bumping up your score 20 to 40 points, it’s worth it to keep an eye on it and monitor how your credit mix is developing as you continue to pursue different types of credit.
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H-Town based Attorney turned credit card rewards expert. Founder of UponArriving.com.