There are five main factors that make up your credit score: the amount of debt you owe, your payment history, new credit inquiries, length of credit history, and credit mix. Credit mix, which is how diversified your credit accounts are, makes up about 10% of your credit score, which can make a big difference when you’re trying to boost your score.
What does credit mix mean? Basically, credit scoring models want to see that you can manage different types of financing, most notably revolving accounts, such as a credit card, and installment accounts, such as a mortgage or auto loan.
Why Does Your Mix of Accounts Matter?
The credit bureaus have determined that the types of accounts you have is predictive of your future credit risk. This means that consumers with the strongest credit scores tend to have a mix of accounts. If your goal is to build or maintain great credit, you’ll want to get and keep different types of credit accounts.
One reason that lenders look at credit mix is to make sure that you can be responsible with multiple types of credit. Maybe you’re great at paying your mortgage but get a little sloppy when it comes to keeping your credit cards current. Showing that you can handle different types of credit—and multiple credit accounts at once—indicates financial reliability to potential lenders.
There are three main types of accounts: installment accounts, revolving accounts, and open accounts. These will appear on your credit report as tradelines.
What Is an Installment Account?
Installment accounts are those that have a fixed payment for a fixed period of time. You are not required to pay the loan in full each month. Instead, you make a payment that is the same every month until the loan is paid in full. Lenders charge you an annual percentage rate (also known as an APR), and this is how they make money.
Here are a few different types of installment accounts to consider.
Auto Loans: Auto loans are issued by a bank, a credit union, or a company that specializes in automobile lending. These accounts are generally paid off over 48 to 60 months, but shorter and longer terms are available.
Mortgage Loans: Mortgage loans are issued by a bank, a credit union, or a company that specializes in mortgage lending. These accounts require the most amount of paperwork during the application process, and a good credit score can help you secure a lower interest rate. Because mortgage loans can span up to 30 years, a lower interest rate can save you a lot of money over time.
Student Loans: These loans are used to pay for college-related expenses, such as tuition, room, and board. Student loans are a unique type of loan because most students are taking classes and not working full-time jobs. As such, the repayment of a student loan generally goes through a process called deferment. Deferment allows the student to postpone their payments until several months after they have graduated or stopped going to school. This gives them the opportunity to secure employment before starting to pay back the loan.
Home Equity Loans: A home equity loan is a fixed amount of money that you borrow against your home’s equity. Once you take that loan out, your payment is the same for the duration of the payback period. These are not the same as a home equity line of credit, which is actually a revolving account.
Personal Loans: Personal loans are generic installment loans that you can take out for many reasons. Depending on the reason, they often do not require collateral. You can get a personal loan from online lenders or from a bank or credit union.
Credit Builder Loans: Credit builder loans are offered by some financial institutions. You put some money down in a savings account, and pay yourself back. Once it’s paid back, you gain access to the savings that you put in. Additionally, you build up a small amount of interest from keeping the money in a savings account.
What Is a Revolving Account?
Revolving accounts are those that have a different payment each month depending on your current balance. You are not required to pay these accounts in full each month. You have the option to “revolve” some of the balance to the following month. Lenders charge you interest on the amount you revolve.
Credit Cards Issued by a Bank, Credit Union, or other financial services company: These are accounts backed by a major payment network, like Visa, Mastercard, or American Express. These accounts are extremely common because almost all banks and credit unions are able to issue them to their customers.
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Credit Cards Issued by aRetail Store: These are accounts that are issued by the stores where you like to shop. These cards are a little different than the previous type in that you can only use the card at the store that issued it.
Credit Cards Issued by an Oil Company: These are accounts that are issued by a petroleum company. As with retail store accounts, these cards can only be used at specific locations, almost always a gas station. Some examples are Techron (Texaco and Chevron) Advantage Card, Exxon-Mobil Smart Card, Shell Card, and BP Credit Card.
Home Equity Lines of Credit:HELOCs let you tap into the equity of your home. These loans are generally easy to obtain from most reputable banks and credit unions. Since these loans allow you to access a portion of your home’s equity. These work similarly to other revolving lines of credit where the payment is determined by the balance and interest rate of the account.
What Is an Open Account?
Also referred to as “open credit,” open accounts are a hybrid of installment and revolving credit. The payment is not the same each month, and it’s usually due in full at the end of each billing cycle. The consumer satisfies financial responsibility for the account when the bill is paid in full each month. This cycle can go on as long as the consumer has an account with the service provider.
An account with a utility company is one example of open credit. A customer with an account for gas or electric service, for example, doesn’t know what their payment will be each month but is responsible for paying in full unless other arrangements are made.
Charge cards are another example of open accounts, They are similar to credit cards, but you are expected to pay the balance off in full by the end of the month.
What Is a Tradeline?
A tradeline is a catch-all for all of the credit accounts that appear on your credit reports. In other words, every single account on your credit files will fall into one of the categories above—revolving, installment, or open—and all of those accounts are tradelines.
Once a tradeline is added to your credit report, it will affect your credit score. You’ll want to make sure you understand what is on your credit reports and ensure you are paying off your accounts on time every time.
Want to get bills you’re already paying added to your credit? Sign up for ExtraCredit to get your utility and rent payments added as tradelines on your credit report.
How Can You Earn the Maximum Points for the Types of Accounts Category?
Before you try to make any changes, be sure you have checked your credit score from Credit.com to see whether this category is bringing your scores down. If it’s not, don’t worry about it. But if it is, you may want to consider the following strategies.
Get an installment loan. If you don’t have an installment loan reported on your credit reports, consider whether it makes sense to get one. If you are going to borrow anyway—or if you want to consolidate higher-rate credit card debt—a personal installment loan may be helpful here. Another strategy is to get a low-rate car loan and then pay it off as quickly as you can.
Apply for a credit card. If you don’t have any credit cards that are currently open and active, consider getting one. A credit card that’s paid on time and has a low (or no) balance can be a very valuable tradeline. If your credit scores are poor, you may need to consider a secured credit card to get started. Keep in mind that applying for new credit can make your score go down a few points as it increases your hard inquiries, but this might be an acceptable trade-off if the boost you get from better credit diversity makes up for it.
Remember, you don’t want to take on financing you don’t actually need—or, more importantly, won’t be able to repay—just to beef up your account mix. The best way to score big points in this category is to add installment, revolving, and open accounts to your credit file organically over time. As you add new loans, be sure to keep track of due dates and watch your debt levels. Remember, you’ll still want to keep your payment history and your credit utilization as positive as possible.
To learn more about what’s in your credit reports, sign up for Credit.com’s ExtraCredit® service. It lets you see 28 of your credit scores so you can get a better idea of where your score is and what areas of your credit you need to work on to improve it. If you decide your credit mix needs some diversifying, check out Credit.com’s credit card and loan partners to find the best fit.
Learn more about the four other factors that affect your credit score
