What’s Credit Mix Ratio and How it Affects Your Credit Score

A handful of factors come into play when credit bureaus calculate your individual credit score. The algorithms used to generate FICO and VantageScore scores differ slightly, but the basics are the same. Payment history makes up the bulk of your credit score calculation, meaning paying on-time for each one of your debts is crucial to winning the game. However, other driving forces – including your credit mix – play a part in the strength of your credit score.

Credit mix is a term many have heard of but don’t fully understand what it means as a facet of credit score calculations. Whether you are just getting started with building your credit history, you’re working to improve it after some missteps, or you’re already part of the coveted “800 club”, understanding this small piece of credit scoring is beneficial. Here’s what you need to know about your credit mix, and how it affects your credit score.

What Credit Mix Means

According to one of the three major credit reporting agencies, Equifax, credit mix is the combination of the various types of credit accounts that are reported on your credit report. Every lender or creditor with which you have an account may or may not report to the credit bureaus. For instance, a credit card company will report your total balance, your highest credit utilization, and your payment history to the credit bureaus. The same is true for any type of loan. When this reporting takes place, your credit score is impacted, for better or worse, depending on how well you manage your accounts.

However, credit scoring also takes into account your credit mix ratio as a way to gauge how responsible you can be with different types of credit. This doesn’t necessarily mean you need 42 accounts open at any given time to have a high credit score. But if you do, managing them well is going to be crucial to your credit score health.

Types of Credit

Within the credit mix calculation, several different types of credit accounts come into play. The most common types of credit used to determine your specific credit mix include the following.

Installment Loans

An installment loan is a fixed credit account that is repaid over time. You and the lender agree on the amount you receive as the loan, as well as the interest rate charged on that loan. Over the course of several months or several years, an installment loan is repaid in the form of principal and interest payments, typically on a monthly basis. Auto loans are installment loans, as are personal loans and student loans.

Revolving Accounts

A revolving account represents an agreement between you and lender for a line of credit that you can access over and over again, up to a limit. Payments are not fixed, but instead, they are based on how much you draw (borrow) from that credit line for a specific billing period. Both lines of credit and credit cards fall into the revolving account category.

Mortgage Loans

Mortgage loans are used to purchase a home, and they technically fall under the category of installment loans. However, from a credit diversity perspective, mortgage accounts are their own genre of debt.

Other Accounts

Other accounts are open types of credit accounts that may not require installment payments or they don’t operate quite the same as revolving accounts. For instance, a charge card that requires full payment of any charges each billing cycle is still reported to the credit bureaus as a type of account, but it has a lesser impact than the other account types listed above.

How Credit Mix Affects Your Credit Score

Each of the common account types makes up your credit mix. Credit score calculations rely on this information to make up 10% of your credit score, and so having a healthy credit mix is necessary. That may mean having and managing payments on an auto loan, a credit card, a mortgage, and a student loan, all at the same time. The more diversified your credit mix, the better your credit score will be (so long as you are maintaining healthy habits in the other categories that impact credit).

On the flip side, someone who only has credit cards reported to the credit bureaus, or someone who only has student loans, may be dinged for not having strong credit diversity. Fortunately, this ding is minimal compared to, say, missing a payment on your mortgage or defaulting on your student loans.

The Bottom Line

Over time, you want to have a good mixture of credit accounts – such as at least one type of each account open and in good standing – reporting to the credit bureaus on your behalf to maintain a higher credit score. However, if you’re just getting started or you’re trying to improve your credit, avoid a common mistake. Adding several different accounts in a short period of time negatively impacts your credit. It signals to creditors that you are in desperate need of borrowing, even if that isn’t the purpose behind the rapid addition of accounts.

Take your time to build your credit mix, and know that while it does impact your score, it isn’t as important as keeping up with on-time payments or maintaining a low credit utilization ratio, as they are the best two things you can do.