12/23/2022
Proper credit management is made up of several important aspects. One of them is the Credit Mix, which represents 10% of your FICO score. For this and other reasons, you should know what it is, its importance and how it affects your score. This is what we will show you in this post.
What is Credit Mix?
It's not hard to guess that this concept is related to having a mix or variety of credit accounts reflected in your history.
This means that you have applied for different types of accounts and have been able to manage them successfully. These can be revolving lines of credit (credit cards or HELOCs) and monthly installment loans (auto loans, student loans, mortgage loans, etc.).
When a lender reviews your credit report, they will find a list of all the accounts associated with your name. If you are a responsible person with healthy finances, it is most likely that your credit history is made up of loans of a diverse nature, often referred to as Credit Mix.
In evaluating an application for a credit, loan or credit card, this mix carries some weight for approval, pre-qualification or denial.
In a way, it tells the bank or financial institution if you are a reliable person who can pay back the money they lend you within the stipulated time.
What is not included in the credit mix?
You already know that the credit mix is made up of installment loans and revolving credit. However, there are two types of credit that do not count in the credit mix, but do count in the FICO score:
- Payday loans. These quick loans are highly expensive, have short terms and are easier to obtain than personal loans. The interest rate can be in the triple digits, making them difficult to repay.
- Title loans. These title loans are secured instruments that require a vehicle as collateral. They also have very high interest rates and if you default, the bank keeps the property to sell it and recover what is owed.
Importance of the credit mix for your credibility
Although this aspect only represents 10% of your FICO score, the weight of the credit mix should not be underestimated because it shows lenders that you have paid your commitments on time.
Put another way, it serves to demonstrate that you can manage different forms of credit using good financial habits.
For example, having a revolving credit (credit card or line of credit) indicates that you can manage different amounts of money each month and pay them off without problems. On the other hand, having a personal loan with monthly payments shows that you can make a long-term commitment and pay what you owe on time.
According to the best-known credit bureaus in the United States, demonstrating your ability with the credit mix is not that complicated. In the case of a fixed installment loan, you just have to make sure you pay it off on the designated date.
If it's a credit card, you can charge what you know you can pay in full on the payment date and not accrue interest.
Impact of credit mix on your FICO score
We've seen that having a credit mix means you can manage different types of accounts. In the sense of impact, the credit mix has a weight equivalent to what represents the acquisition of new commitments (10%).
While this serves to take you from good to excellent, having poor diversification doesn't hurt you much either.
Similarly, if you take out new online credit, you won't improve your credit score that much. But if you try to open too many accounts in a short period of time, the effect of hard inquiries can take a few points off your score.
If you have a lot of debt, this has a negative impact on your FICO, so you need to know how to manage your credit mix well. We suggest you have a good mix of credit to increase your FICO score a bit, but don't borrow just because you are worried about your credit mix.
Instead, pay more attention to credit utilization, which is how much money you use in relation to the limit you have. This reflects the percentage of debt you are carrying, which has a major impact on your credit score.
Another essential tip for a good to excellent score is to check your credit history to keep track of your credit.
Before applying for a credit card or loan, you should be aware of how your score is. This can be done for free and once a year through AnnualCreditReport.com or other sites.
The credit mix is an important aspect that you should not neglect if you want to increase your score and be more likely to have your applications accepted. If you want to know more about other financial topics, Busconomico's experts are here to answer your questions.
Español: ¿Qué es el Credit Mix?