Over the course of your life, you may have acquired different sources of credit. Maybe you took out student loans when you went off to college, or took out an auto loan for your first car. Perhaps you recently opened your own credit card account and want to learn more about credit.
All of these (and more) contribute to your credit mix. According to the Federal Deposit Insurance Corporation (FDIC), your credit mix consists of your revolving credit card accounts and installment loans. When you have a diverse mix of credit and show you can manage your finances for all these different types of credit, it reflects positively in your credit score.
In this article, you will learn:
- What your credit mix is
- Different types of credit
- How you can make your credit mix affect your score
- What isn't a part of your credit mix
What is my credit mix?
Your credit mix is a component of what makes up your credit score. It is considered "highly influential" for your VantageScore® and accounts for 10% of your FICO® score. This means that if you have a healthy credit mix, your credit score could improve, as long as you manage these different types of credit responsibly. Other key factors that help determine credit scores include:
- Payment history
- Age of credit
- Credit utilization ratio
- Derogatory remarks such as charge-offs or filing for bankruptcy
When you open a new credit card account, this activity gets reported to one of the three major credit bureaus—Experian™, Equifax® and TransUnion®. After about 30 days when your report is updated, the additional account will be a part of your credit mix and could reflect positively in your credit score (more on this later).
Everyone has their own credit mix. Yours might consist of, say, a few active credit cards, student loans and a car loan. Let's explore each of the types of credit that could be considered a part of your credit mix.
Different types of credit in your credit mix
There are two main types of credit that can make up your credit mix—revolving and installment credit.
- Revolving credit—allows you to renew your credit as you pay off your debt (for example, credit cards).
- Installment credit—involves a fixed amount of funds that gets utilized over a period of time and paid off in "installments."
Below are some examples of these different types of credit.
Think of this as your typical loan. You borrow a lump sum and repay this amount back over time in addition to interest. Installment credit includes:
- Auto loans
- Student loans
- Personal loans
When you borrow up to a certain amount of funds each billing cycle then pay it back, your credit "revolves" and is able to be borrowed again. Revolving credit includes:
- Secured credit cards (which require a deposit)
- Unsecured credit cards (does not require collateral)
- Store cards/retail accounts (for example, gas station cards, department store cards)
- Home equity line of credit (HELOC)
How can my credit mix affect my credit score?
Having a diverse profile can help you maintain or improve your credit score. If you have a "thin" profile, or few opened/active accounts, it's harder for a potential lender or issuer to see how you handle multiple different forms of credit.
When you have a healthy combination of both installment loans and revolving credit, you're diversifying your credit mix. If you decide to open up a new credit card account, the initial opening may hurt your score from a hard inquiry. However, over time, you'll see an improvement in your overall score due to the fact that you have diversified your credit mix. You'll also be on your way to building credit history, which is another important factor in determining your credit score.
What is a good credit mix?
While there is no "set" amount or mix to get a specific score, and everyone's credit mix will look a little different depending on their lifestyle/needs. The general rule of thumb is to have a dual mix of both installment credit and revolving credit.
However, just because you have diverse credit doesn't mean you'll automatically improve your score. You'll need to make your payments on time and in full to show that you are responsible with your money, making you more creditworthy.
Additionally, you may want to avoid opening too many new accounts in a short period of time. This is due to the fact that several hard inquiries can impact your score and may raise a flag that there's been suspicious activity around your accounts.
What isn't part of credit mix?
There are certain types of credit that may not go into your credit mix, so it may not be of benefit for you to take out these types as they won't reflect positively in your score.
You can use your car as collateral to take out a title loan. To do this, you will need to provide the car's title and your license to prove your ownership. This is generally short term and comes with high interest rates.
Unless both payday and title loans have late payments and/or have to be sent to collections, both loans typically don't get reported to the bureaus, thus will not be included in your credit mix.
As you learn and grow throughout your life, you'll likely take out loans or credit cards to help fulfill life's necessities and desires. Keep in mind that opening these accounts can help improve your credit mix and support your credit score. As long as you make your payments on time and in full, having a diverse portfolio of credit will help boost your credit score and demonstrate your creditworthiness to future lenders and issuers. You can learn more about your credit and credit mix when you enroll in Chase Credit Journey®.