What’s the Right Credit Mix?

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We know FICO says the variety of your credit account types, or “credit mix,” counts as 10 percent of your credit score. And we know VantageScore says the impact of your credit mix is “highly influential” on your credit score. So clearly it is important that we have a variety of credit accounts. The question is, how many do we need of each one?

Well, as you may have guessed, there is no magic number or formula for a credit mix or you’d probably have heard it by now. The best we can do is understand the three main categories of credit accounts, use a mix of them, and do it well.

Three Types of Credit to Throw Into the Mix

1) Revolving Accounts

These are credit accounts that:

  • Do NOT need to be paid in full every month
  • Have minimum monthly payments that fluctuate depending on your balance
  • Accumulate interest on any balance that is carried over into a new month

Examples of revolving accounts include bank credit cards, credit union credit cards, retail cards, gas cards, personal lines of credit, and home equity lines of credit.

TIP: Just because you don’t have to pay revolving credit accounts in full every month doesn’t mean you shouldn’t. In fact, when it comes to credit cards, your goal should be only charging as much as you can afford to pay immediately so you can return your balance to zero every month. This not only proves responsible credit use but also keeps you out of debt and saves you from interest fees.

2) Installment Accounts

These are credit accounts that:

  • Do NOT need to be paid in full every month
  • Have the same minimum monthly payment over a set period of time (by the end of which, the loan will be paid in full)
  • Accumulate interest on the balance until it is paid off

Examples of installment accounts include mortgages, auto loans, student loans, business loans, personal loans, and home equity loans.

TIP: As important as it is to have a mix of credit, don’t take out an installment loan for the sole purpose of improving your credit. If you’re in the market for a new home, great. If you need a new car, absolutely. If you want to take out a personal loan to consolidate some credit cards, do it. The point being, make sure the installment loan you’re taking out is for something you really do need.

3) Open Accounts

These are credit accounts that:

  • DO need to be paid in full every month
  • Do NOT accumulate interest
  • Typically don’t report to the credit bureaus unless you are delinquent

Examples of open accounts include cell phone accounts and utilities

TIP: Keep these accounts current. That may not add good credit (since they don’t typically report to the bureaus if you’re in good standing). But they absolutely DO report unpaid balances, which can do bad things to your credit score.

The bottom line is that consumers with a good credit mix tend to have the highest credit scores. So do your best to add variety, but only with responsible credit usage. Even if you could achieve the “perfect” credit mix, it wouldn’t do you much good if the way you use it drags down your credit score.

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