How a good credit mix can raise your FICO score
By Allie Johnson
December 7, 2015
If you're trying to build a good credit score, mix up your credit profile by using more than one type of account.
Your mix of credit accounts for about 10 percent of your FICO scores. FICO scores consider five different types of accounts: credit card, retail, installment loans, finance company accounts and mortgages, says Christina Goethe, a FICO spokeswoman.
Why does mix matter? Showing how you manage a variety of types of accounts “can help paint a more complete picture” of your risk as a borrower, Goethe says.
Different types of credit accounts are structured and paid differently, adds Jessica Williams-Oestmann, credit counseling manager at American Financial Solutions, a nonprofit credit counseling agency. For example, while a mortgage is a set monthly payment for 15 or 30 years, a credit card account is more open-ended, she says.
“You keep charging, you keep paying,” she says. “It's a whole different ballgame.”
To get a good credit mix, don't apply for a bunch of new credit just to show you can manage accounts responsibly, says Debbie Oliver, a credit consultant and certified FICO professional in Phoenix. Opening credit card accounts can entice people into debt, she says. And each “hard inquiry,” triggered when a company checks your credit history, can cause a dip in your credit score.
Here's a look at the five different types of credit accounts that make for a good mix of credit, along with a credit-building tip for each one:
1. Credit cards
“You keep charging, you keep paying (with credit cards).”
— Jessica Williams-Oestmann,
credit counseling manager
at American Financial Solutions
Credit cards are revolving credit, which means they have no fixed payment amount and you can borrow again and again, providing you repay your debt. People with no credit cards tend to be viewed by lenders as higher risk than those who have managed cards responsibly, Goethe says.
Credit-building tip: It's good to have a major credit card, such as MasterCard or Visa, Oliver says. If you're new to credit or your credit is shaky, apply for a secured card that will report your payments to the major credit bureaus, she says. With a secured card, you put a deposit — maybe $500 or $1,000 — in a savings account to secure the card. Once you have the card, make sure to pay off the account in full every month, Oliver says. “Just charge something small like a tank of gas and pay it off,” she recommends.
2. Installment loans
Installment loans are fixed amounts that you repay over a set period of time, typically by making monthly payments. Auto loans and personal loans are both examples of installment loans.
Credit-building tip: Never had an installment loan? You may be able to get a credit builder loan, which is a secured loan that will help you demonstrate your ability to responsibly pay back an installment loan, Oliver says. A credit builder loan may be secured with money in a savings account that you can't touch for the duration of the loan, Oliver says. “It's a great way to build your credit score, and it acts as a forced savings account,” she says.
3. Retail accounts
Retail accounts, such as department store credit cards, can round out your credit mix. Retail accounts tend to have much higher APRs, so managing these responsibly shows you are good at living within your means and not giving in to temptations that store cards might offer.
Credit-building tip: If you do get a store card, never charge more than you can pay off each month, Williams-Oestmann says. And, no matter how great the sale at your favorite store, remember that paying interest on purchases can cancel out any savings and end up costing you more than if you had paid full price. “With store cards, it can be very easy to accrue balances,” she says.
4. Finance company accounts
Finance company accounts typically encompass personal loans issued to consumers with blemished credit that carry higher-than-average interest rates, Goethe says. Note that while variety is good for your credit mix, having a finance company account on your credit report can also have a modestly negative effect on your FICO scores, Goethe says.
“You do all the other things first, then you get the mortgage.”
— Debbie Oliver,
a credit consultant
Credit-building tip: Don't try to add this type of account to your credit mix to build your credit. A consumer would typically get a finance company loan only because they need the money and they can't get credit somewhere else, Oliver says.
A mortgage is a long-term loan that demonstrates that you manage debt over 15 or 30 years. A home loan is a very positive addition to your credit mix, Oliver says.
Credit-building tip: Wait until you have built a good, or excellent, credit score before you apply for a mortgage. That way, you can get the best possible interest rate and avoid paying thousands of dollars extra over the life of the loan. “You do all the other things first, then you get the mortgage,” Oliver says.
While FICO scores consider five different types of credit accounts, it's definitely not necessary to have all of them. Even with limited variety in your credit mix, you can still get good FICO scores, Goethe says.
Just don't forgo adding credit variety to your profile altogether. Adding a small installment loan alongside a major credit card is a good, slow start to credit mixing.
Overall, don't force your mix of credit. Building credit takes time and effort and like building credit, as Williams-Oestmann says, it's better to let your credit mix develop naturally over time.