A credit score is a three-digit number that gives lenders an idea of how you have paid back debt in the past. And of course, your credit score provides a snapshot into how you will pay back credit in the future. So, when applying for any financial product and a good credit score is required, what factors contribute to a higher credit score? Well, among many other factors, your creditor or lender will take a look at your credit mix.
Like anything in life, having the ability to manage multiple projects, deadlines or even friendships take skill. And this is even true when it comes to your finances and your credit. Demonstrating to your creditor that you can manage multiple credit accounts showcasing your excellent money management skills. It allows your lender to see that you’re organized and that you have a healthy mix of different types of credit.
What is a credit mix?
In short, your credit mix is the different types of credit accounts you have. This can include mortgages, personal loans or credit cards. When either TransUnion or Equifax are calculating your credit score, they consider your mix as a factor. Depending on the credit scoring model, the weight your credit mix is given may depend. Generally speaking, your credit mix contributes to about 10% of your total credit score.
When your potential lenders or creditors are evaluating your file, they are checking to see if there is any indication that you may not be able to manage multiple credit accounts. In short, they want to see evidence that you have successfully paid back more than one debt timely and efficiently. Your lender would also look at your payment history alongside your credit mix.
So what types of credit should you have on your credit report? Revolving credit, installment loans, mortgages and open accounts are the four key credit accounts to have. Let’s break down what each of these means:
Installment Loan
With an installment loan, a great example would be a vehicle loan. This type of loan is paid back, generally with interest, through regular payment within a specific time period. In addition, each payment is typically the same amount. Once you have repaid the loan, the money cannot be accessed or re-used. An installment loan is generally an amount of money provided upfront pending you fit the acceptance criteria and is paid back after you have received your cash with interest and fees.
Examples; Personal loan, vehicle loan or student loan.
Revolving Debt
The most common example of revolving debt would be a credit card. Basically, you can borrow money up to a certain amount, which is your credit limit. Then, you can pay it back in total, or overtime using your minimum payment. Generally, if you carry a balance on your credit card you will be charged interest. Once you pay back your debt, you can access your credit limit again.
Examples; Credit card or personal lines of credit.
Mortgage
A mortgage account is a type of installment loan used exclusively for purchasing real estate. Your lender may typically report your payments to both Equifax and TransUnion, which means it will show up on your credit report. A mortgage will differ from other types of credit accounts because the interest rate can be either fixed or variable depending on your loan terms. In addition, a mortgage may be a more difficult credit account to obtain depending on a variety of factors. Check it out here.
Open Accounts
An open account, or often referred to as a service account, involves receiving a service before you pay for it. A common example would be an electricity bill or your internet service.
Examples; Electricity bills, internet or mobile bill.
The Bottom Line
It’s important to note that out of the five factors that contribute to your credit score, your credit mix holds the least weight. As mentioned, your credit score only contributes 10% to your total score. Even though it’s a low percentage, it’s easy to manage a good credit mix with the right financial advice and tools. For example, Marble’s Boost Program is a great way for you to contribute positively to your credit mix whilst also improving your credit score. Boost offers a loan repayment structure and allows you to subscribe to MyMarble Premium. And every time you make a positive payment, we will report your payments it to both credit bureaus. Before you take on more credit, make sure to assess your current income, debt and if you have the room to bandwidth to expand your credit mix.
