Proper credit management is made up of several important aspects. One of them is the Credit Mix, which represents 10% of your FICO score. For this and other reasons, you should know what it is about, its importance and how it affects your score. This is what we will show you in this post.
- What is the Credit Mix?
- What is not included in the credit mix?
- Importance of the credit mix for your credibility
- Impact of the credit mix on your FICO score
What is the Credit Mix?
It is not difficult to assume that this concept is related to having a mix or variety of credit accounts reflected in your history.
This means that you have requested the opening of different types of account and that you have been able to manage them successfully. They can be loans with revolving installments (credit cards or HELOC) and with monthly payments (loans for cars, studies, mortgages, etc).
When a lender reviews your credit report, they will find a list of all the accounts associated with your name. If you are a responsible person with healthy finances, your record is most likely made up of loans of a diverse nature, which is usually called Credit Mix.
In evaluating an application for a credit, loan, or credit card, this combination carries some weight in receiving approval, prequalification, or denial.
In a way, it tells the bank or financial institution if you are a reliable person who can return the money they lend you in the stipulated time.
What is not included in the credit mix?
You already know that the credit mix is made up of installment loans and revolving loans. However, there are two types of credits that do not count towards the credit mix, but do count towards the FICO score:
- Payday loans. These fast loans are highly expensive, have short terms and are easier to obtain than personal loans. The interest rate can be 3 figures, making them difficult to pay.
- Title loans. These title credits are secured instruments that require a vehicle as collateral. They also have very high interest rates and if you stop paying, the bank keeps the property to sell it and recover what is owed.
Importance of the credit mix for your credibility
Although this aspect only represents 10% of your FICO score, the weight of the credit mix should not be underestimated because it shows lenders that you have paid your commitments on time.
In other words, it goes to show that you can manage different forms of credit using good financial habits.
For example, complying with a revolving credit (cards or line of credit), indicates that you can manage different amounts of money each month and pay them without problems. On the other hand, having a loan or credit with monthly payments shows that you can commit to the long term and pay what you owe on time.
According to the best known credit bureaus in the United States, demonstrating your ability with the credit mix is not that complicated. In the case of a loan with fixed installments, you just have to make sure to cancel on the designated date.
If it is a credit card, you can charge what you know you can pay in full on the payment date and thus not accrue interest.
Impact of the credit mix on your FICO score
We have seen that having a mix of credit means that you can handle different types of accounts. In the sense of impact, the credit mix has a weight equivalent to what the acquisition of new commitments represents (10%).
While this serves to get you from good to great, having poor diversification doesn’t affect you much either.
In the same way, if you take out a new credit online, you will not improve your credit score so much. But if you try to open many accounts in a short time, the effect of hard inquiries (hard inquiries) can take away a few stitches.
If you have a lot of debt, this negatively affects your FICO, so you have to know how to manage your credit mix well. We suggest you have a good credit mix to boost your FICO score a bit, but don’t borrow simply because you’re worried about the credit mix.
Instead, pay more attention to credit utilization (credit utilization), which is the money you use with respect to the limit you have. This reflects the percentage of debt you are handling, which has the greatest impact on your credit score.
Another essential tip for getting a good to excellent score is to check your history to track your credit.
Before applying for a credit card or loan, you should be aware of how your score is. This can be done free of charge and once a year through the AnnualCreditReport.com site or other pages.
The credit mix is an important aspect that you should not neglect if you want to increase your score and be more likely to have your applications accepted. If you want to know more about other financial topics, the experts at Hispanic Business Blog are here to clarify your doubts.