What is “credit mix” and why is it important?

Want good credit? Responsible use of a single loan can get you there. But if you want a top FICO score — the kind that gets you the best rates, the highest limits and the sweetest deals — you may have to mix it up a bit.

That’s because FICO says having a variety of loans is necessary to maximize your credit score. If you don’t have several different types of loans, it won’t kill your score. After all, the “types of credit” component is the least important of the five factors in FICO’s formula. But if you’re striving for scoring perfection, a good credit mix can push you toward the top of the range.

What is credit mix, and how does it affect your score?

Your credit mix makes up about 10 percent of your FICO score. The term “credit mix” refers to the various types of credit accounts you own: open, charge, revolving and installment accounts. Credit mix carries a bit more weight with VantageScore, where it’s combined with the age of your credit to make up 20 percent of your score.

Getting high marks from FICO can save consumers both money and time. Those with high FICO scores may enjoy lower interest rates and a higher likelihood of loan approvals. To calculate its score, which ranges from 300 for borrowers with bad credit to 850 for borrowers with pristine credit, FICO considers five different factors. Those include:

1. Your payment history
2. How much total debt you have (credit utilization)
3. Length of your credit history
4. How much new credit you have
5. What types of credit you have used

At the bottom of that list, your credit mix makes up about 10 percent of a consumer’s FICO score. It carries the same weight as the new credit category, which looks at how much credit you’ve received or applied for in recent months. But, in reality, the two categories aren’t quite equal.

“For the most part, it can be considered the least important of the five main components,” said Barry Paperno, a credit scoring expert who has worked for FICO and Experian.

Based on FICO’s research, having various types of debt isn’t the strongest predictor of whether a consumer will repay loans, but it is helpful.

“FICO’s research has found that, all things being equal, consumers with a ‘mix’ of credit types on their credit reports tend to be less risky than those who have experience with only one type of credit,” Paperno said.

What credit types does FICO consider?

FICO’s scoring formula looks at both the number and variety of accounts listed on a borrower’s credit report. “The number of each type of account is not as important for a person’s score as simply having experience with both types of accounts, either currently or within the recent past,” said Paperno.

The credit reports from the three major credit bureaus, for example, may include the following:

• Installment loans, including auto loans, student loans and furniture purchases
• Mortgage loans
• Credit cards
• Unpaid loans taken on by collection agencies or debt buyers
• Rental and utility data

Utility bills and charge cards are examples of open accounts, meaning they have to be paid in full every month and the amount varies. A mortgage or car loan are examples of installment accounts, requiring a set amount to be paid in full each month.

A credit card account, on the other hand, is a revolving account, a line of credit you have access to without a fixed monthly payment. Your balance determines your minimum payment and there is no set end date to your agreement.

Credit mix matters to lenders because making a fixed payment each month is harder than varying payments to suit your financial situation. Your ability to meet a fixed payment obligation every month is evidence to lenders that you’re reliable as a borrower.

FICO considers all those types of accounts in its credit scoring model, even on-time rental payments if they’re reported to a credit bureau. FICO has touted the usefulness of alternative data such as rent and utility bill payments in scoring consumers with thin credit files. In 2015, it introduced FICO XD, a new credit scoring model based on alternative data.

What is a good credit mix?

You probably already have various types of open and revolving credit. But paying off an installment account such as a mortgage or car loan also counts in your favor. What if you don’t own a house and paid for your car in cash? Do you have to apply for various loans and credit cards in order to build up your FICO score? Not exactly, experts say.

Along with the initial FICO score drop that can happen when the lender checks your credit — what’s known as a hard inquiry — there is the danger that you won’t be able to handle that credit responsibly. That could lead to more problems down the road.

“Opening too many new accounts within a short period of time can be a sign of financial distress to lenders,” said Rod Griffin, senior director of public education at Experian. “If you don’t have any installment credit, you may consider applying for a small loan so you can demonstrate that you can manage it well.”

Remember that credit mix only accounts for 10% of your FICO score. It’s not a credit deal-breaker. But it’s worth noting that taking on loans can be a good thing in the long run. The next time you have to buy a car, remember that loan you’re taking on will help, not hurt, your credit score — as long as you pay it on time each month.

Bottom line

Rather than applying for loans in an effort to boost your score, it makes sense to put your energy into the FICO fundamentals instead. Since FICO says a good score is more dependent on always paying bills on time, focus on keeping credit card balances low and opening new accounts only when necessary. There is little reason for most borrowers to actively seek out a mix of credit.

For consumers who are considering their credit mixes, Paperno said: “It’s best to consider this category as more of a ‘good to know’ than a ‘got to know’ for a good FICO score.”