Types of Debt: How Credit Mix Affects Your Credit Score

Your credit score is one of the most important parts of your personal finances. Your score will affect everything from your ability to get a credit card to the interest rates you pay on loans. 

Many factors go into your credit score, but one that’s often overlooked is called “credit mix”. This refers to the variety of types of credit products you use, and it makes up 10% of your credit score. Here’s everything you need to know about types of debt, credit mix, and how to optimize this aspect of your credit rating. 

What Is “Credit Mix”?

Credit mix is a credit scoring factor that refers to the types of debt and credit products that you have. The types of credit you have might include credit cards, installment loans, and retail accounts, which we’ll touch on more below. 

Credit mix is important because lenders like to see that you have been responsible with managing a variety of credit types. In general, if you have a wider variety of debt types in your credit report, your score will be higher. If you have only one type of credit, your score may be lower. 

How Much Does Credit Mix Affect Your Credit Score? 

In the FICO credit scoring model, credit mix makes up 10% of your credit score. The credit scoring factors are:

• Payment history - 35% of your credit score
• Amounts owed - 30% of your credit score
• Credit history length - 15% of your credit score
• New credit - 10% of your credit score
• Credit mix - 10% of your credit score

As you can see, credit mix has the smallest overall effect on your score out of any of the factors. Your record of on-time payments and the amounts you owe have a much larger impact on your score.

With that said, credit mix absolutely still affects your score. It may not be the first priority to optimize, but it should definitely be on your radar if you’re looking to improve your credit rating. 

Types of Debt/Credit

Credit mix is a measure of the types of credit that you are using or have used in the past. To better understand credit mix, we must first understand the different types of credit that are available. There are two broad categories of debt: Revolving credit and installment credit. Here’s what you need to know. 

Revolving Credit Explained

Revolving credit is a flexible form of credit that allows you to borrow as needed, and repay as needed. It includes credit cards and certain types of lines of credit. 

Instead of a large upfront loan with consistent monthly payments, revolving credit gives you the option to borrow and repay on a recurring basis. In other words, the amount you borrow and repay is flexible, and continually adjusts based on your spending and repayment activity. 

Revolving credit is also flexible in how much you pay. Often there will be a small minimum payment due, with the flexibility to make larger payments to reduce your debt. 

Credit Cards

Credit cards allow you to make purchases at stores and online using borrowed money. When you open a credit card, you’ll be given a maximum credit limit — $3,000, for example. This means that you can borrow up to $3,000 using the card. 

If you put $1,000 in charges on the card, your credit limit will decrease to $2,000. If you then make a $500 payment, your credit limit will increase to $2,500. 

On a credit card, a minimum monthly payment will always be required, but it’s generally a very low amount — often only 1 to 2% of your current balance. You can always pay more (which will help you save money on interest), but you aren’t required to pay any more than the minimum payment. 

Lines of Credit

A line of credit functions similarly to a credit card. You are given a maximum credit limit, and you can borrow up to that limit as needed.

Some lines of credit are secured, meaning that they are backed by the value of an asset you own — like your home. Others are unsecured, meaning that they are not backed by an asset. 

Installment Credit Explained

Installment credit includes most standard loans. You borrow a set amount and then make monthly repayments in the same amount every month for the length of the loan. 

You may be able to make extra payments to pay the debt off quicker, but a significant monthly payment will always be needed. You also cannot typically borrow more without applying for a separate loan (unlike revolving credit, where you can continually borrow more as you repay). 

Mortgages

Mortgages are home loans that you borrow to purchase real estate. These are generally very large loans in the hundreds of thousands of dollars, with monthly payments in the thousands of dollars. 

Auto Loans

Auto loans are fixed installment loans used to purchase vehicles. They are secured by the value of your vehicle, which means the bank can take ownership of your car if you default on the loan. 

Student Loans

Student loans are taken out to help pay for higher education costs. Most student loans are federal loans, which are funded by the federal government and applied for via the Free Application for Federal Student Aid (FAFSA).  Private loans, on the other hand, work a bit differently and are separate from federal loans. Student loans are not secured by any physical asset. 

Personal Loans

Personal loans are generic loans that can be used for a variety of purposes. Borrowers can take out a fixed amount to fund a major purchase, pay down other high-interest debt, or cover a shortfall in their personal budget. Personal loans are generally not secured. 

Improving Your Credit Mix Can Improve Your Credit Score — But It’s Not the Only Way

If you have only one or two types of debt on your credit report, that could be holding your score back a bit. Improving your credit mix may help boost your credit score, but there are many ways to improve your credit without taking on additional debt. 

In most cases, you shouldn’t take out a loan or apply for a new credit card or line of credit  just to boost your credit score. The downsides of taking on additional debt typically outweigh the small boost you might get from improving your credit mix. 

Often, focusing on the bigger factors of your credit score can give you a bigger boost, without taking on more debt. For instance, paying down existing debt can help boost your “amounts owed” credit score factor, which is 30% of your score (compared to 10% for credit mix).

The PayOff Loan™ from Happy Money can help qualified borrowers consolidate credit card debt into a lower-interest personal loan. This can potentially help you pay off your debt faster, reduce interest costs, and boost your credit score. Now that’s a win-win-win!