Welcome to Credit Tip Tuesday Number 5, today we are talking about the importance of Credit Mix and and how that can build your credit.
Balance is an important part of a healthy financial life. The saying "don't put all your eggs in one basket" has endured for a reason. Your overall Credit Mix counts for about 10% of your credit score. Credit scores take credit mixes into account in order to establish a more comprehensive profile regarding a consumer's payment history, trustworthiness, and the ability to successfully manage different types of credit.
What is a credit mix? Credit mix refers to the types of accounts that make up a consumer’s credit report. It is the variety of loans in your credit file and how well you balance that blend. Ignoring it can drag down your credit score, while understanding and improving it can give you a boost!
What Are the Different Credit Types?
There are two kinds of credit: Revolving and Installment.
Installment loans are credits in which you borrow a specific amount and have a series of payments due each month for a predetermined period. Examples are mortgages, auto loans, and personal loans.
Revolving credits are credits in which you do not borrow a specific amount, but rather as much as you need, paying back anywhere from a minimum amount to your full balance month after month. Examples are credit cards and lines of credit.
What Isn't Part of Credit Mix?
Two of the most common types of loans that do not count toward the credit mix are payday loans and title loans. Lenders who provide payday and title loans do not report them to credit bureaus, so they will not impact your credit scores or show up on your credit report. Even if you repay a payday loan on time every month, it will not factor into your credit report.
The only catch is if you default on a payday loan or title loan. In this case, it may be sold to a collection agency, which will then report it on your credit. In other words, payday and title loans cannot help your credit, but they can absolutely hurt it.
Does a Lack of Credit Mix Hurt Credit Scores?
If you want to make your credit score as perfect as possible, having a credit mix will help you get there. Building a financially secure future is a game of inches, so even a portion as small as 10% of your credit score should be taken seriously.
Successfully maintaining a diverse mix of credit may affect your credit scores positively. That does not mean that you should open credit accounts you do not need!
Why lenders like to see a variety of credit
Revolving credit illustrates to lenders that you can borrow varying amounts of money each month and consistently pay it back. Meanwhile, installment credit demonstrates your ability to uphold a long-term agreement and make fixed, on-time payments until you repay what you borrowed.
Having both revolving and instalment credit makes for a perfect duo because the two demonstrate your ability to manage different types of debt.
How to get a good credit mix
If you are aiming to achieve a good credit mix, first know what counts as installment credit: student loans, auto loans, mortgages, and personal loans. Focus on paying it off within the window of time specified. Do this by making sure your set monthly payments are made in full and on time when due.
For those who are new to credit cards, consider opening one so that you have some form of revolving credit and use it wisely — only charge what you know you can pay off in full by the due date. This way, you never have to pay interest on a revolving balance.
Disclaimer: The content provided on the Plastk Financial Inc. Blog is information to help Canadians become financially literate and learn about credit. Plastk is not responsible for building or ruining an individual's credit score or credit rating. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment, credit inquiries, and all other decisions should be made, as appropriate, only with guidance from a qualified professional.