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What is a Good Credit Mix? An Easy-to-Understand Guide

January 25, 2024

A good credit mix is crucial for an excellent credit score. It's vital for getting an auto loan or mortgage with the lowest possible rate.

In this article, we'll delve into the concept of a good credit mix and unravel its impact on your credit score. Once you understand, you’ll have more building blocks for a strong financial foundation.

What is a Credit Mix?

First of all, your credit profile is made up of a handful of factors like:
Payment history (always pay on time as agreed).
Credit utilization (aim to keep your credit card use below 30%).
Derogatory marks (this can be charge-offs, late payments, and more).
Hard inquiries (new applications can cause a temporary drop in your score).
Credit age and type (the longer your accounts are open in good standing, the better).
Credit mix (you should have a blend of credit for the highest possible credit score).

A “credit mix” refers to the variety of credit types that make up your overall credit profile. Lenders can see your credit mix and score when you apply for funding.

A diverse credit mix signals to lenders that you can responsibly manage various types of credit, which positively impacts your creditworthiness. It showcases your ability to handle multiple financial duties at once.

Lenders aren’t always keen to extend their best loans or mortgages to folks who can’t show an ability to pay back several types of credit. However, if you have a few credit cards, an installment loan, and a student loan, it demonstrates versatility in credit management. This diversity shows responsibility and that you are less likely to default on payments.

How a Credit Mix Works?

In a nutshell, your credit mix reflects your financial habits and history. Lenders analyze it to assess your ability to responsibly handle different types of credit. This, in turn, boosts your creditworthiness in lenders’ eyes.

Even if you have a high credit score, if your credit report[1] only shows one credit card or loan, lenders may not to extend large loans or credit cards with low interest rates. In this case, you may need to use cosigners or build more credit before you can qualify for the funding you need.

To understand how a credit mix works, imagine it as a puzzle where each piece represents a different type of credit. When you have several pieces that fit together, you create a better picture of your financial responsibility. This picture impacts your ability to secure favorable interest rates and loan terms.

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How Your Credit Mix Affects Your Credit Score

Your credit score is a number that represents your credit rating, and there are two major scoring systems:

FICO® ranges from 300 to 850.
VantageScore® ranges from 350 to 800.

With both systems, the higher your score, the more financially dependable you may be considered to be.

According to FICO®, 90% of lenders use the FICO® scoring system_[2]. Your credit mix accounts for 10% of your FICO® score. So, the better your mix of credit types, the higher your score. Payment history and utilization account for 65% of your FICO® score. Meanwhile, the length of your credit history and new credit make up the remaining 25% of your score.

Credit monitoring sites like Credit Karma™ and Identity Force™ use VantageScore®. VantageScore® is used more frequently as a consumer-facing credit scoring model. And it does not take credit mix into account. Instead, it scores the “age and type of accounts” reported.

A good credit mix can positively impact your credit score, while a limited or imbalanced mix may have adverse effects.

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How to Get a Good Credit Mix

Building a good credit mix requires a long-term borrowing plan. Start by diversifying your credit portfolio with a mix of revolving and installment credit. However, it's worth noting that a good credit mix is subjective, and what may be good for one institution or finance company may not meet the standards of another.

Revolving Credit

With revolving credit like credit cards, store cards, or personal lines of credit, you have a set spending limit. You can pay off what you spend each repayment period, which is typically monthly. You can also pay revolving credit off over time, with added interest.

Installment Credit

Installment credit is when you borrow a certain amount for something specific. You pay it back in regular amounts. For instance, when you take a loan for a house (mortgage) or a car (auto loan), you make fixed monthly payments until all is paid off. Student loans for school and personal loans also work this way.

With installment credit, you can make additional monthly payments toward principal or interest if your budget allows. This will help you pay off your loan faster. Be sure to understand the terms of your specific loan and if there are any early repayment penalties.

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What are the Different Credit Types?

Let’s break down the various credit types and offer guidance on managing each one responsibly.

Here are a few types of credit that contribute positively to your credit mix:

Credit Cards: Revolving credit that shows your ability to manage short-term borrowing.
Mortgages: Long-term installment credit, indicating your capacity for managing significant loans over time.
Consumer Loans: These can include personal loans for various purposes, showcasing your ability to handle unsecured installment debt.
Home Equity Loans: Using the equity in your home for a loan demonstrates a mix of credit types and responsible use of assets.
Auto Loans: Installment credit for a specific purpose, illustrating your ability to manage a loan for a valuable asset.
Student Loans: Installment credit for education expenses, indicating an investment in your future and showcasing responsible borrowing.
Secured Loans & Credit Cards: These loans are backed by collateral, which can be a positive factor in your credit mix.

Now, watch out for certain high-risk options that may impact your credit profile negatively:

Payday Loans: High-interest short-term loans that can lead to a cycle of debt if not repaid quickly.
Rent-to-Own Agreements: Often involve high interest rates and may not contribute positively to your credit mix.
Title Loans: High-interest loans using your vehicle title as collateral, with the risk of losing your vehicle if you can't repay.
Store Credit Cards with High Fees: Credit cards from certain retailers may have high fees and interest rates, impacting your overall credit health.

Including a mix of credit types, especially those considered more stable and manageable, can help you build a well-rounded credit profile. Proceed with caution toward high-risk credit options to maintain a positive credit history.

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What Isn't Part of Your Credit Mix?

Your credit mix excludes personal details like income, job history, or monthly expenses. It focuses only on the types of credit you use, like credit cards, mortgages, or loans. Your savings, investments, and debit card usage don't affect your credit mix.

The credit mix is about how well you handle different types of credit, not your day-to-day spending or personal information.

Conclusion

A good credit mix is key to building a strong financial foundation. It involves a diverse range of credit types. Remember, your credit mix doesn't consider personal details like income but focuses on how well you handle different types of credit.

Understanding the importance of a balanced credit mix empowers you to work towards a higher credit score and better financial opportunities. Building this mix involves strategic borrowing, combining revolving credit with installment credit and loans. Be cautious of high-risk credit options.

Most importantly, maintain a positive credit history and pay bills on time for a brighter future. Unlock the benefits of a good credit mix, take control of your financial journey, and aim for a secure and prosperous tomorrow.

To boost your credit mix, explore our loan options online or reach out to a Centier rep today.

Sources:

[1] https://www.annualcreditreport.com/index.action

[2] https://www.ficoscore.com/about