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Is Credit Mix Needed to Boost FICO Scores?

Eva Norlyk Smith Ph.D.

May 29, 2013

QDear Eva,

My credit score is around 700, and I know that's pretty good. I want to buy a house in the next couple years, though, so I want to get it higher. I've heard that using a “variety” of credit can help my score. But the thing is I don't really need any more credit. I have my first card that I've had for two years (limit of $2,000 that I pay off every month). I don't need to own a car right now. I never went to school so I don't have loans for that. So do I have to get more kinds of credit to get my credit score higher? — Sophia

AHi Sophia,

It is well worth it for you to go the extra mile to build your FICO score. At your current level of 700, you're actually at the lower end of what is considered a “good” credit score. To get into the “excellent” range — and qualify for the very best lending terms — you need to build your FICO score up to at least 760.Ask Eva

Building your credit score will not just translate into interest savings on your future mortgage. It also means that you can borrow more, because your monthly payments will be lower when the interest rate is lower. How much you save, of course, will vary according to which type of loan you take out and how much you plan to borrow. To see what the savings would be with different credit score levels, check out this mortgage credit score calculator from FICO.

So why isn't your score higher, despite your excellent credit habits? Well, you haven't had much use for credit so far and, as a result, you have what is known as a “thin” credit file. Since you obviously have excellent credit-management habits, one could say that's not fair. But when it comes to credit scores, you're better off playing along, even if you don't like the rules of the game.

Credit scoring models reward people for showing that they can juggle multiple lines of credit well, and this is where having those extra credit cards and loans can come in handy. The good news is you don't have to take out a bunch of loans you don't need. Variety in your credit profile makes up just 10 percent of your FICO score, so while taking out a car loan and paying it off on time might pad your score a bit, it's not going to make or break your score.

Plus, according to a recent study by the Consumer Financial Protection Bureau, more than half of the credit data used to calculate credit scores is derived from credit card accounts. Credit rating agencies derive more than 50 percent of the information collected from the monthly reports submitted by credit card companies, with 40 percent of that coming from bank credit cards and 18 percent from retail credit cards. Only 7 percent of the information in consumers' credit files comes from mortgage lender and a measly 4 percent is derived from auto lenders.

All of this means that taking out one or two more credit cards and using them regularly should be enough to boost your credit score considerably. Here are a few steps to help you on your way.

  1. Ask for a credit limit increase on your existing card. The credit limit on your current card is fairly low, and that can be a drawback. Credit scoring takes into account how much of your available credit limit you're using. The less you use of your available credit, the better, but keeping that healthy low ratio is hard when you've got only $2,000 to play with. Call your card issuer and ask if you're eligible for a credit line increase now that you've had the card for a couple of years. Often, the issuer will be able to give you an answer without referring to your credit file. If they say they have to first pull your credit report, decline. You don't want too many credit inquiries on your credit report, especially if you're thinking of applying for more cards.
  2.  Apply for one or two additional credit cards. Look for cards that supplement your current credit card. You might want to get a cash-back credit card to save a little extra on your daily purchases. In addition, it's useful to have a low-interest credit card. Even though you don't need one now, having access to an inexpensive extra credit line could come in handy one day.
  3. Set up your cards for automatic payments. Managing payments on three credit cards can be a pain in the neck. The more credit cards you juggle, the easier it is to overlook a payment and that, of course, is a big no-no for your credit score. At the same time, to get the full credit-building benefits from your cards, you do have to use them. So use this simple strategy: Use one card for purchases, and put the other two cards to work to pay a couple of your monthly expenses automatically. Next, set those credit cards up for automatic payments from your bank account, so the balance is paid off automatically in full each month. Ideally, have the cards set up to pay monthly expenses that don't vary each month, so you will know how much money is needed to cover the automatic withdrawal.

That may seem like a lot of extra hassle to get credit cards you don't need. However, once you get set up, you will just have to worry about paying one monthly credit card bill. You should see your credit score begin to climb in as little as six months, and at that time, this will all seem worthwhile.

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