Credit Mix: How Does It Determine Your Credit Score?

What is credit mix?

Credit mix refers to how many different types of credit accounts you have. Credit bureaus look favorably on borrowers who have a combination of different types of accounts.

Your credit mix affects your credit score, although its influence depends on the scoring model being used. For instance, in FICO’s model, your credit mix determines 10% of your final score.

On the other hand, VantageScore uses a slightly different system, grouping your credit mix and the age of your accounts together into a single category that they call Depth of Credit. Depending on the model, this constitutes either 21% or 20% of your score (in VantageScore 3.0 and 4.0 respectively). 1  2

What are the three types of credit?

Credit accounts fall into three categories:

• Revolving credit: Revolving accounts allow you to repeatedly borrow up to a certain amount (known as your credit limit) as long as you make minimum monthly payments toward your debt. Examples include credit cards, store credit, and personal lines of credit.
• Installment loans: An installment loan is a set amount of money that a lender gives you with a fixed repayment schedule. Common examples include student loans, car loans, and mortgages.
• Open credit: Open credit accounts have balances that must be paid in full each month. The most common types of open credit are utility bills and phone bills.

How the three types of credit affect your credit mix

In general, to improve your credit mix, you should focus on getting a balance of revolving accounts and installment loans. Most open credit accounts (e.g. utilities) don’t appear on your credit report, which means they don’t contribute to your credit mix.

Some credit scoring models may break down your credit accounts into more than three categories (for example, by distinguishing between mortgages and other types of installment loans). Equifax alludes to this by defining installment loans and mortgages separately.3

In practice, that’s not something that most people need to worry about. It’s enough to ensure you have a healthy mix of revolving and installment credit accounts.

What is a good credit mix?

If you want a good credit mix, then you should have at least one revolving account and one installment loan. After that point, how many credit cards and loans you should have entirely depends on your credit history and personal circumstances.

In general, the more open accounts you have, the better, as long as you manage them responsibly. It is possible to have too many accounts, but it’s rare; you generally only need to worry about it if you see something like “too many open revolving accounts” listed as a risk factor when you check your credit score.

The following examples can give you an idea of what a good and bad credit mix look like:

• Good credit mix: You have two credit cards, a mortgage, and a car loan.
• Bad credit mix: All you have is a student loan.

In the first example, you have two revolving accounts (credit cards) and two installment loans (a mortgage and car loan), whereas, in the second example, you only have an installment loan.

How closing accounts affects your credit mix

Closing an installment or revolving account can lower your credit score by lowering your credit mix. This is especially true if it was your only installment or revolving account.

However, given the relatively small influence that credit mix has on your credit score, a substantial drop in your score when you close an account is more likely due to its effect on your credit utilization rate or length of credit history.

What doesn’t count towards your credit mix?

Some types of loans don’t contribute to your credit mix, including payday loans and car title loans.

These loans don’t appear on your credit report or affect your credit score because they’re usually offered by lenders who aren’t “data furnishers,” meaning that they don’t report to the credit bureaus.

Although these loans don’t count towards your credit mix (and, in fact, don’t positively contribute to your credit score in any way), they can seriously hurt your score if you fail to repay them as agreed.

If your lender sells your debt to debt collectors, then the debt collection agency (which will be a data furnishing company) will probably notify the major credit bureaus that you have a debt in collection. Collection accounts on your credit report are extremely damaging to your score, and they remain on your credit report for 7 years.4

For this reason (and several others, including their very high interest rates), payday and title loans aren’t a good option if you’re looking to strengthen your credit mix and improve your credit score. It’s best to stay away from them unless you have no other alternatives.

Do open accounts affect your credit score?

As mentioned, open credit accounts (such as your utility and cell phone bills) don’t automatically show up on your credit report, which means that paying them on time doesn’t improve your credit mix or any other aspect of your credit score.

The exception is if you sign up for Experian Boost or a paid service that’ll report your rent or bill payments to the bureaus, in which case those payments can improve your payment history.

Note that, while most utility companies don’t report on-time payments, if you neglect to pay your bills for long enough, they may sell your outstanding debt to a debt collection agency. As in the case of payday loans, this will hurt your credit. This means that even if your bills don’t positively contribute to your score, it’s important to pay all of them on time to keep your score from dropping.

How credit mix affects your credit score

Your credit mix contributes to your credit score because the three credit bureaus believe it indicates how well you’re able to manage different types of accounts. However, it isn’t as important as other factors, such as your payment history or credit utilization rate.

The charts below show how much each factor contributes to your credit score in the two main scoring models, FICO and VantageScore. Remember that in VantageScore’s model, your credit mix is grouped along with the average age of your accounts in the Depth of Credit category.

Influence on your FICO credit score

Credit mix is one of the less influential factors in both of the main scoring models. It affects just 10% of your FICO credit score.

Influence on your VantageScore credit score

Depth of credit (which includes credit mix) is more influential in the VantageScore models, affecting 20% to 21% of your VantageScore credit scores.

Because your credit mix doesn’t account for a large percentage of your credit score in either the VantageScore or FICO models, if your score is already low due to a poor payment history or a high utilization rate, then improving your credit mix won’t be enough to counteract the effect.

However, if you already have a high score, then strengthening your credit mix could give your score the boost it needs to get into the “very good” or “excellent” range.

How to improve your credit mix

If you only have one type of credit account, then you can improve your credit mix by opening new accounts of a different type.

Bear in mind that signing up for new loans or credit cards has certain drawbacks. Although maintaining a diverse credit mix boosts your score in the long run, carefully consider how opening new accounts affects your credit score in the short term.

Disadvantages of trying to increase your credit mix too fast

Opening too many accounts in a short period has three major consequences:

• Lowers the average age of your accounts: The average age of your credit accounts contributes to your credit score. When you open a new account, the average age of your accounts will drop, temporarily damaging your score.
• Results in hard inquiries: When you apply for any type of credit, your lender will run a credit check, which will cause a hard inquiry to appear on your credit report. Hard inquiries generally lower your credit score by up to five points. 5 They stay on your credit report for two years, but they only affect your credit score for a few months to one year. 6 7
• Increases your risk of being denied credit: While being denied for a credit card won’t hurt your score, applying for new credit will. The more credit you apply for, the more hard inquiries will show up on your credit report. Creditors sometimes view too many applications for new credit as a sign of financial distress, which could cause them to reject your credit applications in the future.

How long does opening a new account affect your credit score?

How long the new account will affect your credit score depends on your credit history and the average age of your other accounts. For example, your credit score will take longer to recover if you had fewer accounts to begin with or if your other accounts are relatively old.

When should you open new credit accounts to improve your credit mix?

Opening new types of accounts will help you build credit in the long term by improving your payment history and credit mix (as long as you maintain a low credit utilization rate and make timely payments).

This means that if you have a longer-term goal in mind, like improving your credit score before taking out a mortgage a year or two in the future, it can be a great idea to open a new type of credit account (like getting a personal or auto loan if you previously only had revolving credit accounts).

On the other hand, if you’re planning on taking out a mortgage within the next few months, then it’s best to avoid opening any new accounts at all.