Your Credit Score #4

Nov 18, 2014 by

credit mix

Best way to mix credit?

So far in this five-part series on what makes up your FICO® credit score we’ve covered payment history (35%), credit utilization (30%), and age of credit (15%).

The next most important piece—accounting for 10% of your score—is the mix of credit you have available to you. FICO considers some credit mixes “healthier” than others. Read on to learn how you rate on FICO’s healthy credit mix scale.

Types of Credit

Because you’re constantly being solicited to take out more credit, you’re likely aware of the many types of credit in today’s world:

  • Credit cards
  • Retail accounts
  • Installment loans
  • Finance company accounts
  • Mortgage loans
  • And more…

Some of these, like credit cards, are “revolving” accounts. With a revolving account you’ve got a credit limit, but the amount of debt outstanding varies more or less continuously, as does your monthly payment and, potentially, your APR. Others are installment type accounts—a mortgage, for example—where the debtor has borrowed a chunk of money at a point in time and is then obliged to make regular, equal payments over a period of months or years to repay the loan plus interest.

Can You Manage All Types of Credit?

FICO has judged that people who have been granted and demonstrated that they can successfully manage all types of credit are better overall credit risks than people who’ve shown they can manage, say, only a credit card. I suppose that makes sense intuitively, up to a point anyway.

FICO says:

In general, having credit cards and installment loans (and making timely payments) will raise your FICO® Score. People with no credit cards, for example, tend to be higher risk than people who have managed credit cards responsibly.

What Can You Do to Optimize Your Credit Mix?

Before you go out and open new credit accounts with the aim of boosting your credit score through a healthier credit mix, take note of this caution from FICO:

It is not necessary to have one of each [type of credit account], and it is not a good idea to open credit accounts you don’t intend to use. The credit mix usually won’t be a key factor in determining your FICO® Score—but it will be more important if your credit report does not have a lot of other information on which to base a score.

In particular, FICO advises—and I wholeheartedly agree—that you apply for and open credit accounts only as needed. Also note that closing an account doesn’t make it vanish from FICO’s radar. The account will still be on your credit report for up to seven years. And if it’s on your report, the account will play some role in your FICO score. So closed accounts still impact the credit mix piece (and other parts) of your FICO score.

Money Counselor’s Advice

My suggestion on the credit mix part of your FICO score is “chill out.” Credit mix accounts for only 10% of your score, and there’s little you can responsibly do to improve the impact of your credit mix on your score. Focus on the more important pieces of managing your score—making payments on time and credit utilization—and let life take its course. As you take on a mortgage or a car loan in addition to your credit card, your credit mix will take care of itself.

For everything you need to know about managing your FICO credit score, read the Tips sections beginning on page 8 of this free download:

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