Your parents warned you about all the missteps they made early in their credit journey. From facing foreclosure on their first house to racking up hundreds of dollars in late fees to the electric company, their credit score wasn’t always the rosy picture of a stable household it is today.
So you’ve spent the last decade religiously paying every bill on time, paying down your student loans, and paying off your car. But you still don’t seem to be able to get your credit score as high as theirs, even though you’ve never even taken out a credit card. It turns out that might be the problem.
When lenders check your credit, they look for more than just a history of promptly paid bills. A small but potentially significant portion of your credit score is your credit mix. And for some borrowers, it can mean the difference between good and excellent credit.
How a Good Credit Mix Can Improve Your Score
Credit mix receives little attention in the grand scheme of credit score discussions. And there’s a reason for that. While how much it counts varies from FICO to Vantage, it’s still only about 10% of your credit score.
But for many borrowers, it’s still integral to improving overall creditworthiness. It’s also one of the easiest factors to control, so it deserves your undivided attention for (checks Apple Watch) however long it takes you to finish reading this article.
What Is a Credit Mix, Anyway?
Your credit mix is the combination of different types of credit in your credit history. The credit bureaus, which track and calculate your credit score, take a few primary credit types into account.
- Installment Credit. Installment credit is usually related to a large one-time purchase you pay off in installments, usually of somewhat equal amounts each month. Examples include car loans, student loans, personal loans, and mortgages.
- Revolving Credit. Revolving credit is open credit you may take out at any time up to a predetermined amount. The monthly payment amounts depend partly on how much credit you’ve used. Credit cards and home equity lines of credit are common examples. Once you pay off all the debt, you can borrow it again until you close the account without reapplying.
- Open Accounts. Accounts you pay in full each month, such as charge cards, are open accounts. Some bureaus may consider accounts in collections open accounts because you owe the past-due amount right now. Note that utilities are also open accounts. You may not think of them as credit, but electricity, water, and even internet providers are trusting you to pay your bill each month after they provide service. Granted, they’ll cut your service off tout de suite if you fail to pay. But they also report it to the credit bureaus.
Some would argue your mortgage is a separate credit type since it alone can impact your credit score so much, at least when you first get it. But that’s primarily when it counts as part of your payment history or usage. As part of your credit mix, it usually just counts as installment credit — a whole lot of installment credit.
Also note bureaus don’t account for your utility bills in your credit mix. They usually only appear on your credit report if you haven’t paid them. Experian Boost lets you input your utilities directly to receive credit for on-time payments. But even that doesn’t impact your credit mix. Open credit in the form of overdue accounts do count.
Utilities aren’t the only debt that doesn’t count unless you don’t pay them. Bureaus don’t usually find out about medical debt or title and payday loans unless you’re delinquent. Regulations prevent some medical debt from showing up on your account. Not so much with title and payday loans.
What Is a ‘Healthy’ Credit Mix?
There isn’t really a magic ratio when it comes to a healthy credit mix. And even if there were, the credit bureaus aren’t sharing specifics. They’re primarily looking to see that you can effectively handle different types of debt.
As such, a healthy credit mix is one with both installment and revolving credit and no negative entries like late payments or defaults. In a perfect world, you won’t have any open credit on your report (unless it’s from Experian Boost) because those typically represent credit missteps.
How a Healthy Credit Mix Can Improve Your Score
Overall, if your debt philosophy is something like “pay off at minimum what you owe each month,” you should be fine. But having a healthy credit mix can definitely bump up your score, potentially from good to excellent. How much depends on how your credit looks right now.
If you’re just starting out, focus on doing it right. Build your new credit history carefully and thoughtfully, knowing that credit mix is just one piece of the puzzle. At this point, your short credit history is hurting you more than your credit mix. It just takes time and responsible credit use. Get at least a decade of credit history under your belt before worrying about the mix.
If you have a score under 670 or 680, it’s more important to rebuild your credit overall. Focus on things like paying off debts in collection, making payments on time each month, and lowering your credit utilization if necessary. Those things account for well over half your credit score and can cost you tens of thousands of dollars on something like a 30-year fixed mortgage.
If you have good to excellent credit, diversifying your credit mix could improve the terms of your next loan, depending on how much it raises your score. But don’t expect miracles.
If it takes you from good to excellent, it could make a pretty big impact. But if it takes you from good to even gooder or excellent to who-was-that-masked-man, it may make no real difference if you still land in the same basic category for the lender.
It also makes a more significant difference on larger loans, where you stand to save thousands, than on smaller loans.
Still, if you take yourself from a 680 to a 700 or a 750 to a 780, it’s feasible you could save yourself several thousand dollars over the life of a mortgage.
How to Improve Your Credit Mix
Improving your credit mix is straightforward. If you lack one type of credit, you need to get that kind of credit. If you’re lacking installment credit and need a new car, you’re in luck. But most of the time, the reason you lack one or the other is because you don’t currently need it.
And if your instinct is to be nervous about taking out credit you don’t need, hold on to that. It’ll keep you from turning a credit-improvement mission into a money pit. Keep the amount low enough that you can’t get into trouble. You don’t need $20,000 of debt to prove you can handle debt.
If you’re shy of revolving credit, that’s relatively easy to fix. You just need a credit card you can pay in full each month.
My mom used to pay all her bills on her Discover card, write one payment to Discover each month, then cash in on the rewards. You can do something similar with a cash-back credit card or travel rewards card. Or pick up a card for a store you shop at frequently, like the Target REDcard or Amazon Prime Rewards card. If you really don’t want to take out credit you don’t need, try a secured credit card.
If it’s installment credit you need, that’s a bit trickier. You certainly don’t want to buy a house or car just to bump your credit score a few points.
But that doesn’t mean you can’t take out a small personal loan. It’s generally best if it’s for something you already need — in fact, the bank may have rules that require it. For example, you could take out a loan to pay for a family vacation you were already planning.
You can even take out a personal loan to pay off your credit card debt. Just don’t take out a loan with a higher interest rate than the debt you’re paying off.
Using your credit mix to boost your credit score is best for those who already have good or excellent credit. And even then, you should only do it to fully minimize how much interest you have to pay if you take out a major loan like a mortgage or auto loan. Boosting your score by a few points could save you several hundred or thousands of dollars, depending on how much you borrow and how much you raise your score.
Everyone else should look to other ways to improve their credit.