Credit mix: Diversity helps your credit score

Lenders favor consumers who can handle many different types of credit

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Want good credit? Responsible use of a single loan can get you there.

But if you want a top FICO credit score – the kind that gets you the best rates, the highest limits and the sweetest deals – you’re going to have to mix it up a bit.

That’s because FICO says having a variety of loans is necessary for maximizing 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, the only way is to responsibly handle a good credit mix.

“Lenders like to see consumers with a history of on-time payments across each type of account, to demonstrate responsible credit management,” said Heather Battison, vice president at TransUnion. “This helps lenders understand a consumer’s credit risk.”

Getting high marks from FICO can save consumers both money and time: Borrowers with high FICO scores may enjoy lower interest rates and a higher likelihood of loan approvals. So, self-education is important. By understanding FICO’s scoring model, borrowers can take the necessary steps to ensure they score well.  

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
3.       How long you’ve had credit
4.       How much new credit you have
5.       What types of credit you have used

Coming in 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,” says 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.  

"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."

What credit types does FICO consider?
As for FICO, its 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,” Paperno says.  

Various types of loans appear on a credit report and can be factored into a FICO score. Unpaid accounts that have gone into collections can also appear on a report and negatively impact your score.

Although credit reports typically include similar types of information, the data collected by each credit bureau can vary somewhat. 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
  • Bank credit cards
  • Retail credit cards
  • Gas station credit cards
  • Unpaid loans taken on by collection agencies or debt buyers
  • Rental data  

FICO considers all those types of accounts in its traditional credit scoring model, with the exception of the rental data. However, 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.  

Taking on various credit types
Consumers’ on-time rental payments may not boost their FICO scores, but the appearance of those other loan types on their credit reports should be beneficial — assuming they have positive payment history, of course.     

Does that mean you should go down the list and apply for mortgages, student loans and various credit cards in order to build up your FICO score? Not exactly, experts say.

“One or two credit card accounts is sufficient,” Rod Griffin, director of public education at Experian, said. “And, if you don’t have any installment credit, you may consider applying for a small loan so that you can demonstrate that you can manage it well. However, opening too many new accounts within a short period of time can be a sign of financial distress to lenders.”

And not all credit cards are created equal. For instance, bank credit cards tend to have lower interest rates than retail cards, and they typically offer better rewards. On the other hand, retail cards often come with deferred interest deals, and they’re useless if the store closes.

But what’s the harm in applying for many loan types? 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.

That’s especially true for credit cards. Unlike an installment account, a card is a revolving line of credit that you can use at your discretion, up to a certain limit. Being overextended can hurt your score: FICO data show that maxing out a credit card can lower your credit score by as much as 45 points.

So if you’re tempted to go on a spending spree with your new plastic, adding another card to your wallet may not be wise.

Focus on the fundamentals
Rather than applying for loans in an effort to boost your score, for most borrowers, it makes sense to focus on the FICO fundamentals instead.     

Since FICO says a good score is more dependent on always paying bills on time, keeping credit card balances low and opening new loan 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 mix, “it’s best to consider this category as more of a ‘good to know’ than a ‘got to know’ for a good FICO score,” Paperno said.   

See related: How to build up a thin credit profile for a future mortgage, A two-step plan for building young credit 


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Updated: 11-18-2017