Depending on how much you know about credit, credit reports and credit scores, you may already know what a credit mix is. If you haven’t heard of it before, a credit mix is the combination of the different types of credit accounts open under your name.
A mortgage, a credit card, a car loan and a cell phone bill all represent different types of credit accounts. If you have all four, you already have a good credit mix. The reason why having a good credit mix is important is that it’s one of the factors used to determine your credit score. And the good news is that it takes little effort to optimize your credit mix.
With interest rates on the rise and the expectation that low-interest mortgage rates are a thing of the past, getting your credit score as high as you can is crucial in getting you a mortgage rate you can afford when buying or selling your home in downtown Toronto, or anywhere else for that matter.
Read on to learn how diversifying your credit accounts can give you a boost in the right direction.
How a Credit Score is Calculated
There are five factors used to determine a credit score:
- Payment History – basically your payment track record. This is the most important factor in determining your credit score, which is why paying your bills on time is so important.
- Credit Utilization – this is the amount of credit you’re using divided by the amount of credit available to you. Your credit utilization is the second most important factor used for calculating your credit score so it’s important that you don’t max out your credit cards or line of credit. Using 30% or less of your available credit shows that you are living within your means.
- Credit History – the longer your (good) credit history, the easier it is for lenders to trust that you can manage debt and eventually pay it off.
- Credit Inquiries – this refers to credit applications. Generally, if you are applying for a lot of different credit accounts, it gives the impression that you are desperate for money. Checking your credit score doesn’t affect it, and doing so regularly is actually a good way to know where you stand. You can find out your credit score easily these days. Equifax allows you to check your credit score and credit report online for free.
- Credit Mix – the number and variety of credit account types you have.
What Your Credit Mix can do for your Credit Score
Of the five credit score factors, credit mix has the least impact on your credit score, accounting for roughly 10% of your overall credit score. However, it also requires the least amount of effort to improve.
Having a history of successfully managing different types of credit accounts looks good to lenders and may also give your credit score the bump it needs to take it from a “good” to an “excellent” score.
Having that excellent credit score could mean paying lower interest rates and getting more credit options. That’s not to say that you should run out and start applying for different types of credit all at once. In fact, as mentioned above, doing so would probably hurt your credit score.
But if you have a credit card or two, and have had them for a while, you may want to consider applying for a small loan for now if you’re planning on applying for a mortgage in the future. This could help your credit score by increasing your credit mix and your payment history.
What are the Different Types of Credit Accounts?
There are four main types of accounts that most credit products fall under:
Instalment loans. This is credit that’s extended as a loan to be paid back over time, usually through regularly scheduled payments. Examples are car loans or student loans. Once the payments are complete, and the loan is repaid, the account is closed.
Revolving credit. This is credit that is available to you up to a certain dollar amount. You can pay back what you borrow or carry a balance and pay interest. Paying off the balance doesn’t close the account. Examples are credit cards and lines of credit.
Open accounts. These are basically your monthly bills. Your cell phone and utility bills, for example, can be included in your credit mix.
Mortgage accounts. Although they are a lot like instalment loans in that you receive a loan that you pay down every month, the fact that the interest rate on a mortgage can be either fixed or variable may lead to a mortgage being classified differently than an instalment loan.
While having a variety of credit accounts can improve your credit score, remember that the key is that they must be managed responsibly to improve your credit score.
