When trying to improve your credit score, you’ll come across tons of tips and tricks. Much of the advice has to do with credit utilization, loans, and payment history, but one term you probably haven’t come across on #FinTok yet is “credit mix.”
Your credit mix or “credit portfolio” is one of the main factors in calculating your credit score; it’s just not as often discussed. Your credit mix doesn’t affect your credit score as much as something like a missed payment, but you should still know what it is and how it can impact you.
Some credit scoring models put more weight on your credit mix than others, but no matter the case, every point to your credit score counts. Having a good credit mix can nudge your score from good to excellent, so why not tend to it a little better?
What Is a Credit Mix?
Credit mix refers to the different types of credit accounts you have open. Credit comes in various forms, e.g., credit cards, personal loans, and mortgages. With every kind of credit, you’ll find different terms and policies that you have to follow to keep your account in good standing.
That’s why it’s called a “mix;” your credit report doesn’t only list out your credit cards or loan history; it covers all of the kinds of credit you use. You might think that having one credit account is enough to prove that you’re a reliable credit user, but sadly that’s not the case. Credit lenders like to see that you have a diverse credit portfolio.
How Much Does Your Credit Mix Matter?
Your credit mix matters because it demonstrates how knowledgeable and responsible you are about using credit. You can compare your credit report to your job resume.
Let’s say you’re applying for a job as a hotel receptionist. If you’ve worked at one restaurant for the past four years, it can demonstrate that you know how to keep a job, speak with customers, and perform well, but it doesn’t necessarily make a hotel manager confident that you’d be the right fit for the hotel gig. The same concept applies to what your credit mix can tell credit lenders about you.
If you have a fantastic history with auto loans, you should have no problem applying for a new one, but the road to a home equity line of credit (HELOC) might be harder to navigate.
Age and type of credit count for 21% of VantageScore. This metric covers how long a consumer has held credit accounts and if they have a diverse mix of credit. If your credit score has been stagnant for the past couple of months and you’re looking to see a change, sprucing up your credit portfolio can make a difference.
Your credit mix might be the weakest part of your credit history, but you can quickly turn that around by diversifying your portfolio.
How to Have a Good Credit Mix
Despite there being many different kinds of credit accounts for you to choose from, there are only two kinds of credit: revolving and installment.
Installment credit has a fixed end date with payments due every month. Installment forms of credit include mortgages, student loans, auto loans, and personal loans.
Revolving credit doesn't have a specific end date or set balance. Instead of spacing out your owed balance equally over a specific time, a minimum payment is due each month. You can pay more than the minimum on your revolving credit balance, but you’re not required to. Credit cards are the most common type of revolving credit, but a home equity line of credit (HELOC) also falls into this category.
Having a portfolio that includes a blend of revolving and installment credit is the best way to ensure your credit mix isn’t the factor holding back your credit score.
How Many Credit Accounts Should You Have?
You need to open one credit account to start building credit, and you need at least two to ensure you have both kinds of credit (installment and revolving). Having two credit accounts makes for a good starting point, but you should know that credit scoring formulas don’t punish you for having too many accounts, but you can have too few.
Having very few accounts can make it hard for scoring models to calculate an accurate score for you. Four or fewer accounts is generally considered to be a "thin file." It's harder to score high with a thin file because lenders view thin files as riskier.
Credit bureaus suggest you have five or more accounts and that they are a mix of credit types. STOP; don’t go applying for credit just yet. Although five is a good number to aim for, it’s also a lot of responsibility. Every account you open has its own set of terms and conditions that you have to keep up with. It’s better to have two accounts with flawless records than five with subpar account activity.
Make sure that if you’re diversifying your credit portfolio, it’s by opening an account that you need and know you can handle. You should never risk the other factors of your credit score, like payment history and utilization, just to gain a couple of points towards your credit mix.
How To Safely Improve Your Credit Mix
If you’re looking to improve your credit mix, make sure you’re going about it responsibly. Never open a new account without having a valid reason to. Before opening a new credit account, ask yourself the following questions:
- Do I need a new account?
- Will I be able to make my payments on time?
- Will this negatively affect my credit utilization rate?
- Would this new account’s terms and conditions work with my personal finances?
- Do I need to improve my credit mix right now?
Remember that your credit mix is only responsible for 10% of your total score. In most cases, there’s room for improvement in other heavy-hitting areas before it’s time to address your credit mix. You’ll most likely take on new credit accounts as you get older, so there’s no rush.
If you know it’s time to diversify your portfolio because you’re about to ask for a large loan, look for credit accounts that are easy to keep up with, like Extra. Extra is a debit card that builds credit, and it’s one of the most accessible forms of revolving credit to keep up with.
By using simple credit accounts like Extra, you can safely diversify your credit mix and build credit. By having a small loan and swiping with Extra, you can learn to manage different types of credit, and with due time, your credit report will reflect a robust credit mix.