Credit mix: Understand what it is and how it influences your credit score

Maintaining a good credit score is essential for obtaining better credit and financing terms. One of the factors that directly influences your score is the credit mix.

Although it is not the most well-known criterion, it plays an important role in how credit agencies evaluate your financial responsibility.

If you want to learn more about the credit mix, follow this text and discover how it influences your score!

What is a credit mix and how does it work?

The credit mix refers to the variety of different types of credit you have, including any combination of revolving credit, such as credit cards, and installment credit, like personal loans, car financing, or mortgages.

Credit agencies, like Equifax, Experian, and TransUnion, look at this combination to assess your ability to manage different types of debt effectively.

A good credit mix shows that you can handle various financial responsibilities, which can improve your credit score.

For example, if you only have credit cards, it indicates that you lack experience in managing long-term loans, like a mortgage.

On the other hand, a history that includes both revolving and installment credit shows a broader and more diverse financial control.

Different types of credit that can compose your mix

Now that we’ve discussed what a credit mix is, let’s understand the different types of credit that can make up your mix.

Revolving credit

Revolving credit is a type of credit where the available amount renews as you make payments. Credit cards are the most common example of revolving credit.

In this model, you have a pre-approved limit, can spend up to that limit, and pay the debt over time.

However, if not paid in full each month, interest accrues on the remaining balance. The major advantage of revolving credit is flexibility.

You decide how much to spend and how much to pay each month, which can be useful in emergency situations. However, if mismanaged, revolving credit can lead to debt accumulation and negatively affect your score.

Installment credit

Installment credit is a type of credit that has a fixed amount borrowed and a set payment schedule. Some examples include personal loans, mortgages, car financing, and student loans.

In this type of credit, the total debt amount is divided into monthly installments that must be paid within a specific period, usually with a fixed or variable interest rate.

Installment credit offers greater predictability since the installment amount is fixed, making financial planning easier.

Additionally, it is viewed positively by lenders because it demonstrates that the borrower can manage long-term debt.

Learn what is not part of the credit mix

Not all forms of debt or payments are part of the credit mix, so learning what is included is an important step in the process.

Expenses such as utility bills, rent, or cell phone bills are usually not considered in your credit mix unless you fail to pay them, and they go into collections.

Debts with informal lenders or loans between friends and family are not reported to credit agencies and, therefore, do not directly influence your mix.

The relationship between credit mix and your score

The credit mix may not be the most determining factor of your score, but it has a significant impact.

According to the FICO scoring system, which is widely used in the United States, the credit mix can represent up to 10% of your total score.

Therefore, a variety of credit types demonstrates that you can handle different financial responsibilities.

If you only have one type of credit, such as only a credit card, this may limit your score. The scoring system seeks to evaluate how diversified your credit history is.

Someone with only revolving credit may be considered a bit riskier than someone who has a combination of revolving and installment credit, as the latter shows a greater ability to manage different types of debt.

A healthy mix can improve your score over time. When you add a new type of credit to your history and manage it properly, it shows that you are capable of taking on new financial responsibilities, which results in a gradual improvement in your score.

Is it possible to improve the credit mix?

Yes, it is possible to improve your credit mix with some simple but effective strategies. Although the credit mix is only a part of the score calculation, optimizing this part can make a significant difference in the long run.

Become an authorized user

An efficient strategy to diversify your credit mix is to become an authorized user on a family member’s or trusted friend’s credit card.

You will have access to that account’s credit history, which can increase your score, as long as the primary cardholder manages credit well.

As a result, you begin to build or diversify your credit history without necessarily opening a new credit line directly.

Apply for credit only when necessary

While it is important to diversify your credit mix, do it responsibly. Constantly applying for credit generates many inquiries on your credit report, temporarily lowering your score.

Instead, apply for new credit only when truly necessary and have a plan to manage the payment.

This avoids the temptation to acquire more debt than you can manage while keeping your credit history healthy.

Avoid excessive applications

Another important point is to avoid applying for multiple credits within a short time frame. Every time you apply for credit, lenders perform a “hard inquiry” on your report, which temporarily lowers your score.

Several applications within a short period indicate that you are desperate for credit, which is a red flag for lenders.

Therefore, it is advisable to plan your credit applications carefully and space them out appropriately.

The credit mix may not be the most well-known factor when it comes to credit score, but it plays an important role in how credit agencies assess your financial health.

A diversified mix, with both revolving and installment credits, shows that you can manage different types of debt, which can improve your score over time.

With strategies like becoming an authorized user or applying for credit responsibly, you can improve your mix and, consequently, your credit score.

Remember: improving your score is a process that takes time, and financial discipline is essential to achieving your goals.

Keep accessing our content to learn more about how to optimize your personal finances and make informed decisions about credit and loans!

If you want a suggestion, also check out our content explaining how to build credit quickly in a simple way!