In this guide, we are explaining the main factors that make up your credit score, so you can make sure yours is as strong as possible. Payment History and Your Amount of Debt and their level of impact to your credit scores are the first two factors we’ve covered, and they account for about 65% of the points that make up your credit score.
Here, we will look at the types of accounts (or “credit mix”) which accounts for roughly 10% of the points in your credit score. If your goal is to build or keep great credit, you’ll want to understand how this factor works.
This guide will be most helpful to you if you know how this factor currently impacts your credit scores. You can get a truly free credit score updated monthly at Credit.com. It will give you a letter grade for each of the factors impacting your scores, including this one, Account Mix.
Revolving accounts are those that have a different payment each month depending on your current balance. These are accounts that you are not required to pay in full each month. You have the option to “revolve” some or all of the balance to the following month. Lenders charge you interest on the amount that you revolve and this is how they make money. Some examples of revolving accounts are:
- Credit Cards Issued by a Bank or a Credit Union – These are commonly referred to as Visa® or MasterCard® accounts because of the logo that appears on the front or back of the card. These are extremely common because almost all banks and credit unions are able to issue them to their customers. Remember, credit reports will keep a history of your accounts even if they have been closed. As such, most consumers have several of these credit card accounts on their credit reports. Other examples include the Discover® Card, and American Express®.
- Credit Cards Issued by a Retail Store – These are accounts that are issued by the stores where you like to shop. These cards are a little different than the previous two types in that you can only use the card at the store that issued it. Some examples are Macys® Card, Target® Card, Pep Boys Card® and a Dillard’s® Card. There are hundreds of other examples. Most of us have several of these types of cards.
- Credit Cards Issued by an Oil Company – These are accounts that are issued by a petroleum company. As with retail store accounts these cards can only be used at specific locations, almost always a gas station. Some examples are Texaco® Card, Exxon® Card, Shell® Card and BP® Card. These cards are also very common and easy to obtain. Most of us have or have had several of these types of cards.
- Home Equity Lines of Credit – Also known as a HELOC, these are loans that allow you to tap into the equity of your home. These loans are generally easy to obtain from most reputable banks and credit unions. Since these loans allow you to access a portion of your home’s equity, the payment is determined by the amount borrowed or used. These accounts are very common in part because the interest is tax deductible in most cases. Check with your tax advisor to see if your account qualifies for a tax deduction.
Notice – For your information, debit cards (also known as check cards) are not considered true credit cards. They are essentially nothing more than a check in the form of a credit card. As such they do not report on your credit files and will have no impact, good or bad, to your credit scores.
Installment accounts are those that have a fixed payment for a fixed period of time. As with revolving accounts you are not required to pay them in full each month. You are allowed to make a payment that is going to be the same every month until the loan is paid in full. Lenders charge you an annual percentage rate (also know as an APR) and this is how they make money. Some examples of installment accounts are:
- Auto Loans – Auto loans are issued by either a bank, a credit union or by a company that specializes in automobile lending. These accounts are generally paid off over 48 to 60 months but shorter and longer terms are available.
- Mortgage Loans - Mortgage loans are issued by either a bank, a credit union or a company that specializes in mortgage lending. These accounts require the most amount of paperwork during the application process and a good credit score can help you secure a lower interest rate. A lower interest rate will save you a lot of money over time.
- Student Loans – These loans, obviously, are used to pay for college related expenses such as tuition, room and board. Most student loans are federal loans issued by the federal government. Private student loans are issued by banks and other financial institutions. Student loans are a unique type of loan because most students are taking classes and not working full time jobs. As such, the repayment of a student loan generally goes through a process called “deferment.” Deferment essentially allows the student to postpone their payments until several months after they have graduated or stopped going to school. This gives them the opportunity to secure employment before the loan requires the first payment.
- Home Equity Loans – These are not the same as home equity lines of credit (aka HELOCs). Although they both allow you access to your home’s equity the structure of the loans are not similar. A home equity loan is a fixed amount of money that you borrow. Once you take that loan out your payment is fixed for the duration of the payback period. Whereas a home equity line of credit gives you the flexibility of taking out some of or the entire approved amount.
- Signature Loans – Signature loans are just what they sound like. You walk into a bank or credit union and tell them you want to borrow some money and sign a guarantee to pay it back. You don’t have to tell the bank what the money is for and you can use it for anything you like including vacations, investments, home improvements or a shopping spree.
Open accounts are probably the least common of the three we’ll profile. Also referred to as “open credit,” it is a hybrid of installment and revolving credit. The payment is not the same each month and it’s usually due in full at the end of each billing cycle. The consumer satisfies his financial responsibility for the account when he pays the bill in full each month. This cycle can go on as long as the consumer has an account with the service provider.
An account with a utility company is one example of open credit. If Roger has an account with PG&E for electric and gas service to his apartment, he doesn’t know what his payment will be each month. As you can imagine, electric bills can vary a lot from month to month depending upon the seasons and air conditioner/heater usage. Roger is responsible for this varying payment each month.
Most utilities, cellular service, some American Express cards, and some gas station cards are other examples of open credit.
|Subscriber||Discover Card||Citibank||American Express|
|Minimum Monthly Payment (Terms)||$19||$2,000||N/A|
|Date Opened||April, 2002||August,
|Date of Status||March, 2005||March, 2005||March, 2005|
|Last Payment Date||February, 2005||February, 2005||February, 2005|
|Loan Type||Credit Card, Terms REV||Mortgage||Credit Card, Terms OPEN|
Every single account on your credit files will fall into one of the categories above: Revolving, Installment or Open.
Why Does Your Mix of Accounts Matter?
When these accounts report on your credit records they are coded very specifically so that not only consumers and lenders but also credit scoring models can easily identify them. Statistical analysis has determined that the type of accounts you have is predictive of your future credit risk.
So what does all of this mean to you the consumer? Consumers with the strongest credit scores, including FICO credit scores, tend to have a mix of different types of accounts.
Keep in mind that all of the accounts on your credit reports count, even if they are closed. Most of us have had several credit cards, mortgages, auto loans and student loans in our life so this example is probably very realistic.
There really isn’t one target “sweet spot” that we should all aim for in our account mix. That’s because your mix of accounts might be great for your score but terrible for someone else’s and vice versa.
How Can You Ensure Earning the Maximum Points Available out of the Types of Accounts Category?
Before you try to make any changes, be sure you have checked your free credit score from Credit.com to see whether this category is bringing your scores down. If it’s not, then don’t worry about it. But if it is, then you may want to consider the following strategies:
- If you don’t have an installment loan reported on your credit reports, consider whether it makes sense to get one. If you are going to borrow anyway – or if you want to consolidate higher-rate credit card debt – a personal loan that is reported as an installment loan may be helpful here. Another strategy is to get a low-rate car loan then pay it off as quickly as you can. (It will still count even if you pay it off a few months after you get it.) You can shop for a personal loan here or find credit unions offering auto loans nationwide here.
- Avoid finance companies – Finance companies are commonly referred to as “lenders of last resort.” Their rates and terms are not as favorable as those offered by banks and credit unions so higher risk consumers tend to depend on them for their credit needs. As such, having a finance company account on your credit report could cost you points.
- If you don’t have any credit cards that are currently open and active, consider getting one. A credit card that’s paid on time and has a low (or no) balance can be a very valuable credit reference. If your credit scores are poor you may need to consider a secured credit card to get started. You can shop for credit cards by credit score here.
This article was originally published on Oct. 17, 2013 and updated on Sept. 2, 2014.