While the precise recipe for FICO’s secret sauce isn’t available to consumers, the basic components and the weight they carry are public (see the chart below).
As you can see, “credit mix” makes up one of the smallest slices of the pie. But if you haven’t managed to conquer that sliver of FICO territory, it can be hard not to zero in on it.
We talked to a couple credit experts to find out what exactly credit mix is (and isn’t) and how much time you should spend obsessing over it.
What is credit mix?
The credit mix component of your FICO score refers to the diversity of your credit portfolio.
“It’s the variety of loans that you have,” says Anthony Sprauve, spokesman for FICO.
FICO’s model rewards those who have a blend of different types of credit accounts in their credit profiles. FICO’s purpose is to predict for lenders whether you’re able to repay them, and juggling a variety of debt types shows you’re probably up to the challenge.
However, Sprauve says, while a healthy credit mix will boost your score, you won’t lose points for failing to have a mix of credit.
“[Credit mix] is a nice-to-have, but it’s not a need-to-have,” he says.
Which types of accounts increase your credit variety?
If you want to keep things simple, credit can be broken into two categories that contribute to your account diversity: (1) Revolving lines of credit (ie, credit cards) and (2) installment accounts (student loans, mortgages, car loans, etc.), says Wayne Sanford, founder of Dallas-Fort Worth–based New Start Financial.
Why does FICO reward those who have both? Keeping up with installment loans demonstrates the reliability lenders like – but these loans also come with a big incentive to make payments on time (they’re often secured with your house or vehicle). Revolving accounts give you a lot more freedom to fail, since you don’t run the risk of losing the things you bought with them.
“They can take the house back, they can take the car back. But they’re not going to take back the underwear you bought with your credit card last week,” Sanford says.
The idea is to show lenders that you can handle both levels of responsibility.
Within revolving and installment credit accounts, there is a wealth of other account types: store credit cards, charge cards, auto loans and mortgage loans. So does having, say, a store card and a card issued by your bank contribute to your credit variety?
No, according to Sprauve.
“The score doesn’t see your Sears or Macy’s card differently than another credit card,” he says.
As for charge cards, FICO does view them differently from regular revolving cards, and they would therefore contribute to your credit mix, Sprauve says. There’s just one complication: Cards marketed as charge cards don’t always report to the bureaus as charge cards. If it doesn’t show up as a charge card on your reports, it won’t be factored into the credit mix portion of your FICO as a different type of card.
“It’s hard to distinguish between how the card is marketed and how it’s reported,” Sprauve says.
What about closed accounts? Does that car loan you paid off or that card you closed still factor into your credit variety? Closed accounts stay on your reports for between seven and 10 years (depending on the circumstances), and, during that time, they will continue to get factored into your credit mix, Sprauve says.
Is there an ideal credit mix?
There’s no magic combination of ingredients for the perfect credit mix salad. Nor does FICO like certain ingredients more than others. The way FICO sees it, having a credit card and a car loan is just as good as having a credit card and a mortgage.
“The score is looking at the mix,” Sprauve says. “It’s seeing that this person has two types of credit, or this person has three types of credit, or this person has one type. But it’s not ranking one type of credit higher than another.”
A rule of thumb, Sanford says, might be to shoot for two or three revolving accounts for every installment account (while not going overboard and digging yourself into debt, of course). But even that combo might not be the best solution for every consumer.
“Every credit profile is a thumb print, and every thumb print is different,” Sanford says. “What will affect one person one way won’t affect another person the same way. It’s a loose-fitting formula. There are numerous variables.”
How much should I obsess over this?
For those trying to reach the 850 summit, there may be a temptation to calibrate your credit mix. But acquiring accounts you don’t need is a lot of effort for a small payoff.
“If you’re trying to get better credit, this area is one of the smaller things to pay attention to,” Sanford says. “You’re looking at 10 percent [of your FICO score].”
If you’re trying to bump up your score a bit to secure a better rate on your mortgage (which can save you thousands over the course of more than a decade), you might look at this portion of your score and see if there’s an easy way to maximize it. For example, if you have several installment loans, you can easily add a credit card to the mix and never swipe it. Those who want a low-maintenance solution might do the following:
“Attach a bill to the credit card and set it to pay every single month,” Sanford says. “And then set up your online bill pay and have that pay off the credit card.”
If you’ve got the opposite problem (several revolving accounts, but no installment loans), things aren’t so easy. With credit cards, Sanford points out, you can charge a small amount each month and pay it off without getting hit by interest. Installment loans don’t have that flexibility, meaning it’s harder to justify opening new ones to increase your credit mix. Over time, as you need a car or a home, you can acquire installment loans and enjoy the credit boost they bring you.
“There’s that phrase, ‘if it’s not broke don’t fix it,'” Sanford says. “I wouldn’t tell someone that, to get a higher score, you have to acquire debt.”
In the meantime, Sprauve says, if you’re trying to get an excellent FICO score, there are bigger areas to concentrate on. After all, payment history accounts for 35 percent of your score, and credit utilization accounts for 30 percent. These are both areas you can maximize with nothing more than a credit card and good payment habits.
“It’s important not to become obsessed with the 10 percent around multiple types of credit and to keep your eye on the prize of the 65 percent, which is made up of paying bills on time over time and keeping balances low,” Sprauve says.
… So, can you get into the upper FICO echelons without worrying about credit mix?
“Absolutely,” Sprauve says. “You can have a great FICO score if you have one credit card and you are managing it well.”