by Maurie Backman | April 10, 2020
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Not all types of credit are created equal.
Having a good credit score is important. Not only can a high score increase your chances of getting a loan, but it'll help you snag the most favorable rates out there. Good credit could also be your ticket to getting approved to rent a home. And in some cases, it could help you land a job. Therefore, it's important to understand the various factors that go into calculating your credit score, one of which is credit mix.
To be clear, credit mix is not the most important factor in determining your score. Your payment history (the extent to which you pay bills on time) carries the most weight, followed by credit utilization and how long you've had your accounts open. In fact, your credit mix comprises just 10% of your credit score. But not only can having a solid credit mix help keep your score in good shape; it's also indicative of your general financial health.
Credit mix refers to the different types of credit accounts you have open and how well you manage them. Credit accounts generally fall into two categories:
Examples of installment loans are mortgages, auto loans, and personal loans. Meanwhile, when we talk about revolving credit, we're generally referring to credit cards, although home equity lines of credit are another example.
A healthy credit mix usually consists of both installment loans and revolving credit. If you have a mortgage, an auto loan, and two credit cards, that's generally regarded as a nice mix of credit that will help keep your score in good shape. On the other hand, if you have only four credit cards and no other accounts, that could reflect more poorly on you, causing your credit score to decline.
Now, what if you have only a few credit card accounts in your name, but you don't need a car and aren't ready to own a home? Should you take out a personal loan specifically to have an installment loan in the mix?
Not necessarily. It's usually not a good idea to borrow money when you don't need to. As mentioned above, your credit mix makes up just 10% of your credit score. If you're strong in areas that carry more weight, such as payment history and utilization, you're likely to maintain good credit even if your credit mix isn't particularly diversified. And if you're not carrying balances over month to month, you don't need to apply for a personal loan, or any other type of loan, in an effort to diversify your credit mix.
That said, if you tend to carry a credit card balance from month to month, you may want to apply for a personal loan. Chances are the interest rate attached to it will be lower than what a credit card will charge you. Once you have that loan secured, you can use it to take the place of some of the charges you might otherwise put on a credit card and pay off over time.
Remember, not everyone has that classic mortgage-car loan-credit card mix of accounts. Don't stress too much over your credit mix -- especially if your credit score is already high. Instead, focus on being on time with your payments, not running up too high a credit card tab, maintaining long-term accounts in good standing, and avoiding applying for too many new credit accounts at once.
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