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Why Is a Credit Mix Good for Your Credit Score?

Why Is a Credit Mix Good for Your Credit Score?

Variety is the spice of life, and variety of credit can also spice up your credit score. Known as “credit mix” or “credit diversity,” the different types of credit you have and manage wisely can positively affect your credit score. That’s not to say you should start opening a bunch of credit accounts at the same time, though! Read on for more details about credit mix and how to be responsible with it.

Credit Types

In addition to payment history, credit utilization, and length of credit history, credit mix is considered when factoring your credit score. Your credit score is the number that lenders, employers, or apartment landlords may look at before offering you a loan, job, or apartment to rent. There are two main types of credit that go into the credit mix part of your credit score, installment loans and revolving credit.

Installment loans. These loans include student loans, auto loans, personal loans, and mortgages. They have a starting balance and a fixed end date with payments due each month. 

Revolving credit. Revolving credit doesn’t have a specific end date or set balance. The most common types of revolving credit are credit cards and lines of credit. When you use revolving credit, you’ll need to watch your spending so you don’t spend more than your limit. You’ll have a minimum payment due each month. As you pay down your balance, the remaining amount up to your limit becomes available to use again.

Because installment loans and revolving credit require different types of financial management, it can be smart to have each type of credit as part of your account diversity. Even if you don’t use a credit card often, pay the balance in full each time, or have the account open just for an emergency, having an available revolving credit account shows you have the discipline to be responsible with credit. With either type of credit, paying your bills on time, every time will help your score improve as your credit history grows.

Credit Cautions

As mentioned earlier, you don’t want to apply for several new credit accounts at once. Each time you request a loan, it’s considered a hard inquiry – when a lender makes a credit information request that includes your full credit report. Each hard inquiry deducts points from your credit score. It can also look suspicious or make lenders think it’s a sign of a financial problem.

It’s also important to note there are types of loans that aren’t included in the credit mix part of your credit score, namely payday loans and title loans. So if you take out a loan of this kind and pay on time, it won’t show up on your credit report. However, if you miss payments, the loan may be sold to a collection agency, which will report your default to a credit agency and put a ding on your credit. So payday and title loans can only hurt your credit score, not help it.

Mix Credit Carefully

The bottom line is that a variety of credit can be good, but in moderation, and only if you manage it wisely. A lending professional can help you learn more about credit and make credit choices that are right for your situation.