Credit Mix: Using it to Build a Healthy Credit Score
Your credit score is made up of five different parts: payment history, amounts owed, length of credit history, new credit, and credit mix. Each of these specified categories are weighted differently, with credit mix making up 10% of your overall score. But what exactly is credit mix, and how does it work?
Here’s everything you need to know about credit mix, and how to use this part of your credit score to your advantage.
How credit mix works
Credit is defined as an agreement between a lender and a borrower to give them a set amount of capital to use on expenses.
There are several different forms of how you can obtain credit from a lender. For example, credit cards are considered a form of credit. Loans like a mortgage or auto loan are also considered a form of credit. And what the credit bureaus are looking for in evaluating your credit portfolio is a healthy mix of different types of credit.
There are two different types of credit:
- Installment credit: These are typically fixed-rate loans with an eventual payoff date. This includes buy now pay later products, auto loans and student loans.
- Revolving credit: These are tools where you can pull money from somewhere, and pay it back in a timely manner. And as you pay that debt off, you can continue to borrow further from it. Examples of these include credit cards and home equity lines of credit (HELOC).
For a healthy credit mix, it’s best to have both types of loan in your portfolio. However, it’s normal for those building their credit to be stuck with installment credit first — and that’s ok. The most important part of building your credit score is to pay your bills on time each month. But as time goes on, do your best to have a mix of credit in your portfolio. By doing this, your score can reflect a great credit portfolio — pushing you towards an excellent credit score.
How much does credit mix matter?
Credit mix is a small part of your entire credit score — 10% to be exact. So while it’s important, it’s also not a make or break part of building your credit score to its fullest potential. Here’s the full breakdown of what goes into your credit score:
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- New Credit: 10%
- Credit Mix: 10%
[Source: Experian. What Is a Good Credit Score?]
So while your credit mix is important, the core parts of building and maintaining your credit score are paying your bills in full each month and keeping your spending low — relative to the amount of credit you have available. And as long as you can do those two things right, your credit score should be in a good position.
Here’s how this currently looks on my credit score:
As you can see, “total accounts” has a “low impact” on my credit score.
How to have a healthy credit mix
On my credit profile, it shows a total of 76 total accounts — which accounts for a wide mix of credit. I have many credit cards (many of which are closed), a mortgage, student loans (which are now paid off) and auto loans (that are paid off).
This shows the credit bureaus that I’m able to maintain a wide variety of credit types responsibly. But again, the more important factor is the fact I have a 100% payment history. Without this, my credit score would likely be negatively affected.
Building a healthy credit score
The journey of building a healthy credit score can seem daunting, but it can be simple with the right approach. If you’re just beginning building your credit, here’s what to keep in mind:
- Pull your credit report to see where you currently stand
It’s estimated that roughly one-in-four consumers don’t know their credit score. However, that isn’t the core issue, but rather a lack of knowledge of financial resources available to consumers.
If you don’t know your credit score, that’s ok! Take a moment to pull your credit report at Annualcreditreport.com. This will give you a solid starting point to analyze what is on your report. And if there are any errors or mistakes, it will give you time to contact the correct credit bureau to dispute it.
- Make all debt payments on time
There are so many rumors and misnomers about what it takes to build a healthy credit profile, especially on social media. Ignore most of it and don’t let it distract you away from the core principle: pay your bills on time. By doing this, your credit score will largely build itself.
- Don’t overspend
No matter where your credit mix or credit profile currently sits, spending too much can cause your credit score to fall. So while it’s important to prove your credit worthiness, it’s also equally important to spend wisely.
- Be patient
Your credit score journey will be a lifetime, so there is no need to rush the process. As long as you’re being financially responsible and paying your bills on time, you stand to have a great chance of building a healthy credit mix and credit score.
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