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There are five main factors that make up your credit score: the amount of debt you owe, your payment history, new credit inquiries, length of credit history, and credit mix. Credit mix, which is how diversified your credit accounts are, makes up about 10% of your credit score, which can make a big difference when you’re trying to boost your score.
What does credit mix mean? Basically, credit scoring models want to see that you can manage different types of financing, most notably revolving accounts, such as a credit card, and installment accounts, such as a mortgage or auto loan.
The credit bureaus have determined that the types of accounts you have is predictive of your future credit risk. This means that consumers with the strongest credit scores tend to have a mix of accounts. If your goal is to build or maintain great credit, you’ll want to get and keep different types of credit accounts.
One reason that lenders look at credit mix is to make sure that you can be responsible with multiple types of credit. Maybe you’re great at paying your mortgage but get a little sloppy when it comes to keeping your credit cards current. Showing that you can handle different types of credit—and multiple credit accounts at once—indicates financial reliability to potential lenders.
There are three main types of accounts: installment accounts, revolving accounts, and open accounts. These will appear on your credit report as tradelines.
Installment accounts are those that have a fixed payment for a fixed period of time. You are not required to pay the loan in full each month. Instead, you make a payment that is the same every month until the loan is paid in full. Lenders charge you an annual percentage rate (also known as an APR), and this is how they make money.
Here are a few different types of installment accounts to consider.
Revolving accounts are those that have a different payment each month depending on your current balance. You are not required to pay these accounts in full each month. You have the option to “revolve” some of the balance to the following month. Lenders charge you interest on the amount you revolve.
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Also referred to as “open credit,” open accounts are 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 financial responsibility for the account when the bill is paid 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. A customer with an account for gas or electric service, for example, doesn’t know what their payment will be each month but is responsible for paying in full unless other arrangements are made.
Charge cards are another example of open accounts, They are similar to credit cards, but you are expected to pay the balance off in full by the end of the month.
A tradeline is a catch-all for all of the credit accounts that appear on your credit reports. In other words, every single account on your credit files will fall into one of the categories above—revolving, installment, or open—and all of those accounts are tradelines.
Once a tradeline is added to your credit report, it will affect your credit score. You’ll want to make sure you understand what is on your credit reports and ensure you are paying off your accounts on time every time.
Want to get bills you’re already paying added to your credit? Sign up for ExtraCredit to get your utility and rent payments added as tradelines on your credit report.
Before you try to make any changes, be sure you have checked your credit score from Credit.com to see whether this category is bringing your scores down. If it’s not, don’t worry about it. But if it is, you may want to consider the following strategies.
Remember, you don’t want to take on financing you don’t actually need—or, more importantly, won’t be able to repay—just to beef up your account mix. The best way to score big points in this category is to add installment, revolving, and open accounts to your credit file organically over time. As you add new loans, be sure to keep track of due dates and watch your debt levels. Remember, you’ll still want to keep your payment history and your credit utilization as positive as possible.
To learn more about what’s in your credit reports, sign up for Credit.com’s ExtraCredit service. It lets you see 28 of your credit scores so you can get a better idea of where your score is and what steps you need to take to improve it. If you decide your credit mix needs some diversifying, check out Credit.com’s credit card and loan partners to find the best fit.
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