March 26, 2020
In the first 3 sections, I covered the top three factors that impact your credit score. In this segment, I am going to cover the 4th part of your credit score which has the same amount of impact on your score as the 5th part of your score which will be covered in the next post.
So without further ado, here is what you need to know about the next factor that determines your credit score. The factor I am talking about is your mix of credit.
Believe it or not, the people who made up the credit scoring models truly believe it is important to have different types of credit. I guess they want to encourage us all to play the credit game since that is their business and when we all play, they make more money.
I know it sounds ridiculous and stupid, but since they make up the rules, we have to figure out how to use them to our advantage.
The question is, what is the proper mix of credit?
Unfortunately, just like the rest of the credit scoring factors, the credit bureaus will never tell you the ideal mix of credit. But that doesn’t mean you can’t figure out what is a good mix of credit for yourself and how to use it to help your scores.
Before we go over how to have a good mix of credit, let’s cover the different types of accounts first. There are several different types but in the eyes of the credit bureaus, they are broken down into two main types.
These are installment accounts and revolving accounts. Installment accounts include mortgages, car loans, student loans and personal loans. Revolving accounts include credit card accounts, credit lines and equity lines.
Mortgages are included in installment accounts but are also considered on their own. A mortgage is any loan that is secured by real estate. This would include a home, a commercial building or land. And depending on how a creditor reports to the credit bureaus, it may or may not include an equity line of credit, also known as a HELOC (Home Equity Line Of Credit).
I have seen credit reports that list an equity line as a mortgage and others that list it as a revolving account.
Installment accounts are loans that are scheduled to have payments over a certain amount of time, resulting in the loan being paid in full by the time the final payment is made. This would include car loans, furniture loans and unsecured or personal loans as well as some others.
A revolving account is an account that can be charged, paid down and charged again. This is how credit cards work. You are normally given a credit limit which is the maximum amount you are allowed to owe on that card. You can charge up to that amount and can pay it down then charge on it again.
But not all credit cards are equal. There are different types. You can have the typical credit cards that can be used anywhere that accepts that type of card or you can have a card that only works at certain stores.
The first type of card is called a bank card and includes Visa, Mastercard, Discover, American Express and a few others. The second type of card is called a retail card and is often a department store card or gas station card.
In determining your credit score, it doesn’t matter which type you have but be aware that interest rates are usually higher on the cards that can only be used at one store as opposed to those that can be used at many different businesses.
Keeping in mind that this credit scoring factor only accounts for 10% of your credit score, it is not going to ruin your credit to have a less than ideal mix. However, it can affect your score so having the proper mix is better than not having it.
So what is a proper mix of credit?
As I stated earlier in this post, there is no magic formula given that says exactly what it should be but having all three types of accounts will help your score.
Having a lot of any type of account may not hurt your score very much but it can prevent you from getting new credit as some creditors worry about that. For example, if you have 10 mortgages showing up on your credit report, you will have difficulty getting another one until you have paid off one or more of the mortgages you currently have.
Once again, the credit bureaus will not tell you how many of each account you should have but based on experience, it seems that having one to three mortgages, one or two installment loans and three to five credit card accounts is ideal. Keeping in mind that these are estimates and that this factor only accounts for 10% of your score, don’t get too worried about having the “perfect mix of credit”.
When considering this credit scoring factor, probably the most important thing for your credit score is to keep a balance between revolving and installment accounts as stated above. But if you can’t afford to take on more credit, don’t add accounts just to build up your score because missing payments will hurt your score far more than having the ideal mix of accounts will help it.
For more information about credit, you can buy my book Crack The Credit Code – To Play The Game, You Need To Know The Rules. It is available on Amazon here: Crack The Credit Code
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