Credit Mix: Why is it Important?

10% of your credit score depends on your credit mix. So, understanding the credit mix is vital. A better mix of credit lines, credit cards, recurring credit, and loans can boost your creditworthiness. Learn more about Credit Mix from the article.

Who would not want a good credit score? But a dream FICO score of >850 is something you can’t do casually. Previously, I discussed the role of Credit Monitoring services in building creditworthiness. 

Read: Credit Monitoring Services: What is it? Why it is Important?

One of the prime roles of monitoring techniques is ensuring you have a good credit mix. 

However, you can’t retain a good mix if you don’t know what it is or how it impacts your credit scores. 

So, that’s what the article is about. 

Here, we will look beyond Credit History and Credit reports. Nobody’s denying them. But a good Credit Mix also dramatically impacts our financial portfolio. 

Credit Mix and Your FICO Score

Want good Credit Reports? 

Use your credit limit wisely. It may get you there. But that’s not enough to achieve the dream FICO score we were discussing. 

 It would help if you mixed up your credit profile a bit to do this. 

FICO tracks the kind of loans running against your name. A versatile credit profile helps you maximize your credit score. 

Why does this happen?

Well, that’s simple.

• Situation 1: You have 5 credit cards.

It sends a message that the owner is overtly relying on credit or lacks personal financial leverage. The bottom line is he’s running on credit. What he’s actually up to is out of the question. 

What the credit bureaus perceive is what matters the most. 

Alternative: The concerned can have 2 credit cards, one shopping card, and another travel and cashback card. The last one may be a credit line from NBFC apps. Now, FICO will appreciate this mix. It sends a message that all the credit lines are utility-based. Experian will perceive that all these cards are objective based. 

It depends on how you use these cards at the end of the day.

• Situation 2: 3 loans, summing up to a few million dollars, running against your name. 

Consequently, you won’t get a new loan at a low interest rate until your EMIs are all cleared. 

Alternative: Suffice one or two of your needs with a Discover Credit Line, an Earnin, or a Chime credit line. Also, have one Sapphire or Citi Credit card for purchases and a BoA card for miscellaneous purposes. 

Learning About Credit Mix in Detail

By now, you have a practical idea of the credit mix. Now, let us consolidate our ideas here. 

Credit mix is an essential factor that impacts FICO scores. It checks the diversity of your credit profile. 

The more diverse it is, the higher your chance to get the best interest rates, higher limits, and whacking shopping deals. 

A good credit mix can take your credit score over 850 easily. 

Moreover, Credit Mix does not have a clinically negative impact on your credit score. In a nutshell, it is a win-win factor, impacting your creditworthiness. 

Most Americans line up for credit cards. They stack up cards, hoping that a fat credit line (all cards added up) will leverage their financial strength. 

Many reward mongers have over six credit cards in the US. 

But if you have such issues, you may use credit card management apps. These apps seamlessly track data from all cars and present you real-time synopsis form all card spends.

Forbes reports that 13% of US citizens have over five credit cards. 

Hence, the problem of poor credit mix is the dominant issue. 

Different Kinds of Credits

To overcome the problem of poor credit mix, we need a portfolio with more than one kind of credit, described below. 

Revolving Credit

A revolving credit line is the best for small merchants, one-time big purchases, adjusting monthly add-up expenses, etc. 

It works just like credit cards:

• You will get a credit limit with a fixed upper cap
• Pay off the amount and borrow

A credit card is a form of revolving credit account. But we won’t consider it, as we are upto diversifying our credit portfolios. 

So, the alternative revolving credit accounts/options for you would be:

• Retail Credit Cards 
• Home Equity Credit Lines 
• Personal Credit Lines 

Installment Credit Line

Installment loans are the best option if you need a one-time lump sum for any contingency. You have to repay the amount in small installments. You will also get a flexible (preferably long) period to pay back the installments. Hence, your installment value would be within limits as well. 

Installment credit lines are a diverse credit profile with different forms of credit under it. Each one may give an edge of diversity to your profile. A mix of various installment credits can also help rebuild credit. Read the article on Rebuilding Credit: Learn The Best Techniques.

Let’s check out the best installment loans that you can apply for:

Mortgage Loans

Mortgage loans are flexible. It is a loan that you may get against an asset mortgage. However, the rates of mortgage loans depend on several factors. So, it is flexible. A report by The Lending Tree confirms that the existing mortgage debt in the US is $12.14 trillion over 84 million loan units. 

Therefore, we can conclude that mortgage loan payback is much more flexible. Most importantly, you may pay back over time and in small and compatible interests.

Personal Loans

There are two types of personal loans. The first is secured personal loans—banks like BoA issue loans against standard rates and often against mortgages. 

The second is unsecured personal loans. There are several lenders for unsecured personal loans in the US. It includes loan apps, loan agencies, etc. 

However, unsecured personal loans can be an evil debt trap, too. 

According to Market Watch, 23 million US people avail unsecured personal loans, with an average payback balance of $11,500.

Pro Tip: Use the unsecured credit lines wisely. These loans incur higher interest rates that multiply according to payback time, default status, and FICO score. Avoid debt traps at any cost. If you are already in debt, try to modify your Payment Habits. Read about Payment Habits: How To Build Your Financial Status?

Student Loans

Student loans may have low interest rates. The payback time is volatile, as well. Most banks offer student loans in the US. In 2022, around 61% of graduates availed of student loans in the US. 

Learn why Credit mix matters to lenders and credit bureaus

We already know that a good credit mix elevates your fiscal profile. It stages you as a responsible borrower. But what’s the underlying trick that makes the credit mix click?

Factor 1: Different credit types have unique liabilities. Some of them need timely EMI payments. While others seek spot payments, others may require you to spend a threshold amount within a fixed time. 

Lenders take you as a responsible credit user when you meet all such obligations. 

Factor 2: The Credit bureaus also use the same formula. They can’t personally ponder on the use habits of people. Hence, they track the credit types and payback behavior. Based on their reports, our FICO scores vary.

Your Credit Utilization Ratio also matters

The Credit Utilization Ratio of credit card users matters. Most consumers spend as much as they want from their credit cards. They are only hooked on paying back the amount in time. However, you should spend 30% of your credit limit. However, the Credit Utilization Ratio doesn’t matter if it’s a mortgage or personal loan. 

That’s why you should have a good credit mix instead of blind reliance on multiple credit cards. 

Other ways to improve the credit mix

Applying different credit lines is one of many ways to create a good credit mix. There are other aspects, too. 

Becoming an Authorized User

Authorized users have their credit behavior reports. However, they don’t have cards or credit lines against their name. Hence, they may shed off the liability of paying back or keeping tabs on creditworthiness. 

Just ensure that the card owner pays back in time. 

You have a good credit mix if you are an authorized user of 2 to 3 unique credit cards. 

You can also check out the steps to register authorized users to help you with the process. 

The Bottom Line

Credit mix plows good credit score. So, check your credit profile to identify repetitions now. But don’t apply for a new loan only to create a versatile credit profile. 

Pay back the existing credits first. 

The more important part is understanding how the credit mix works. It will help users to build better credit scores quickly. That’s all for now. If you need further advice on building a credit mix or Build Credit From Scratch, comment below.

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