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Your parents warned you about all the wrong moves they made early in their credit journey. From facing foreclosure on his first home to racking up hundreds of dollars in late fees to the electric company, his credit score wasn’t always the rosy picture of a stable home it is today.
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So you’ve spent the past decade religiously paying every bill on time, paying off your student loans, and paying off your car. But it sounds like you still can’t get your credit score as high as theirs, even if you’ve never taken out a credit card. It turns out that could be the problem.
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When lenders check your credit, they look for more than just a history of bills paid immediately. A small but potentially important part of your credit score is your credit mix. And for some borrowers, it can mean the difference between good and excellent credit.
How a Good Credit Mix Can Improve Your Score
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The credit mix gets very little attention in the grand scheme of credit score discussions. And there’s a reason for that. Although how much this matters varies from FICO to Vantage, it is still about 10% of your credit score.
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But for many borrowers, it is still integral to improving overall creditworthiness. This is one of the easiest factors to control, so it deserves your undivided attention (Apple Watch checks out) however long it takes you to read this article.
What Is Credit Mix, Anyway?
Your credit mix is the combination of the different types of credit in your credit history. Credit bureaus, which track and calculate your credit score, take into account a few primary credit types.
installment credit. Installment credit usually relates to large one-time purchases you pay in installments, usually a somewhat equal amount each month. Examples include car loans, student loans, personal loans and mortgages. revolving loan. Revolving credit is open credit that you can withdraw at any time up to a predetermined amount. The monthly payment amount depends partly on how much credit you’ve used. Credit cards and home equity lines of credit are common examples. Once you have paid off all the debt, you can borrow it again until you close the account without reapplying. Create an account. Accounts that you pay in full each month, such as charge cards, are open accounts. Some bureaus may consider opening accounts in collections because you just pay past dues. Note that utilities also open accounts. You may not think of them as credits, but electricity, water and even internet providers are counting on you to pay your bill every month after providing the service. Granted, if you fail to pay, they will cut your service from the tout de suite. But they also report it to the credit bureaus.
Some would argue that your mortgage is a different credit type because that alone can affect your credit score so much, not least when you first get it. But that’s mainly when it’s counted as part of your payment history or usage. As part of your credit mix, it usually only counts as an installment credit — a full portion of the installment credit.
Also note that bureaus don’t account for your utility bills in your credit mix. They usually show up on your credit report only if you haven’t paid them. Experian Boost lets you directly input your utilities to get credit for timely payments. But even that doesn’t affect your credit mix. Open credit counts as overdue accounts.
Utilities aren’t the only debt that doesn’t matter until you pay them off. Bureaus usually don’t find out about medical loans or title and payday loans until you are delinquent. Regulations prevent some medical debt from showing up in your account. Not so much with title and payday loans.
What is a ‘healthy’ credit mix?
There really is no magic ratio when it comes to a healthy credit mix. And even if there were, the credit bureaus are not sharing the details. They mainly want to see that you can handle different types of loans effectively.
As such, a healthy credit mix is one that has both installment and revolving credit and no negative entries such as late payments or defaults. In an ideal world, you wouldn’t have any open credits on your report (unless it’s from Experian Boost) because they usually represent credit missteps.
How a Healthy Credit Mix Can Improve Your Score
Overall, if your loan philosophy is something like “the least you have to pay each month,” you should be fine. But a healthy credit mix can certainly boost your score, potentially from good to excellent. How much depends on what your credit looks like now.
If you’re just starting out, focus on doing it right. Build your new credit history carefully and thoughtfully, knowing that the credit mix is only one piece of the puzzle. At this point in time, your short credit history is hurting you more than your credit mix. It only takes time and responsible credit utilization. Have at least a decade of credit history under your belt before worrying about mixing.
If your score is less than 670 or 680, it is more important to rebuild your credit overall. Focus on things like paying off debt in collections, making on-time payments each month, and reducing your credit utilization if necessary. Those things account for more than half of your credit score and can cost you thousands of dollars on something like a 30-year fixed mortgage.
If you have good to excellent credit, diversifying your credit mix can improve the terms of your next loan, depending on how much it elevates your score. But don’t expect miracles.
If it moves you from good to excellent, it can make a huge impact. But if it takes you from the best to the best or the masked person to the best, it may not make a real difference if you still fall into the same basic category for the lender.
It also makes a more significant difference on larger loans than on smaller ones, where you stand to save thousands.
Still, if you move yourself from 680 to 700 or 750 to 780, it’s possible that you could save yourself several thousand dollars over the life of a mortgage.
How to improve your credit mix
Improving your credit mix is straightforward. If you don’t have one type of credit, you need to get that type of credit. If you’re short on installment credit and need a new car, you’re in luck. But most of the time, the reason you lack one or the other is because you don’t currently need it.
And if you have a tendency to be nervous about taking credit, you don’t need to. This will prevent you from turning a credit-improvement mission into a money pit. Keep the amount low enough that you don’t get into trouble. You don’t need a $20,000 loan to prove that you can handle the debt.
If you shy away from revolving credit, it’s relatively easy to fix. All you need is a credit card that you can pay off in full every month.
My mom used to pay all my bills on her Discover card, write down a payment to Discover each month, then redeem the rewards. You can do something similar with a cash-back credit card or travel rewards card. Or choose a card for a store where you shop often, such as a Target RedCard or Amazon Prime Rewards card. If you really don’t want to take credit that you don’t need, try a secured credit card.
If it’s installment credit that you need, it’s a little trickier. You certainly don’t want to buy a house or a car just to raise your credit score a few points.
But that doesn’t mean you can’t take a small personal loan. It’s generally best if it’s for something you already need – in fact, the bank may have rules that require it. For example, you can take out a loan to pay for a family vacation you were already planning.
You can also take a personal loan to pay off your credit card debt. Do not take out a loan with an interest rate higher than the loan you are paying.
Using your credit mix to increase your credit score is best for those who already have good or excellent credit. And even then, you should only do so completely to minimize how much interest you’ll have to pay if you take out a major loan like a mortgage or auto loan. Raising your score by a few points can save you several hundred or even thousands of dollars, depending on how much you borrow and how much you raise your score.
Everyone else should look for other ways to improve their credit.
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