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How Do Different Types of Credit Affect My Credit Score?
In this article
A tenth of your credit score is determined by your credit mix. This factor of yourevaluates how responsible you are with different types of credit accounts like student loans, mortgages, car loans, and credit cards. But what is the right mix to increase your score? Let’s investigate.
There are several credit account types available to you on the market. These include:
These allow you to choose how much you pay back per payment period. These are usually subject to a minimum payment and have a monthly due date. These flexible options include:
- Charge card
- Credit cards
- Lines of credit
- HELOC (Home Equity Line of Credit)
### Instalment accounts
Typically these require you to pay a fixed amount each month until the balance is paid down in full. These fixed options include:
- Auto loans
- Student loans
### Open credit
This is a pre-approved loan that allows you to receive services up front in trust that you’ll pay for them in full at the end of every service period. These open options include:
- Electricity bills
- Phone bills
- Water bills
To have a healthy mix, your credit report should have exposure to all three credit types to show that you’re able to handle varying credit obligations. If you don’t own a credit card, you could start by applying for one (FICO considers borrowers without a credit card as higher risk). Or, if you only have one type of credit account but are ready to take the next step – consider opening a product in a new category. Collection accounts are another credit type that may appear on your credit report, but it’s best if you don’t have them in your history because they lower your credit score. These accounts are opened by collection agencies after a lender sells your debt to them for profit.
Don’t open a new credit account for the purpose of boosting your credit score. Adding products to your lineup gradually will give you a much better result over time. For example, don’t get a credit card if you’re not prepared to pay it off every month. Most borrowers experience a slight dip in their score for the first few months after purchase.
There’s also a risk of overwhelming yourself with too many credit products. Taking on too many accounts too quickly can lead you to rack up debt and hurt your score by missing or being late on payments. You may ding your score with all the inquiries made to your credit report in close proximity, which accounts for another 10% of your credit score.
Because every credit scoring formula is different, it's hard to estimate how much your credit could take a hit for opening a new account type. Each borrower’s credit report will be impacted differently depending on other factors like payment history.
Remember: your credit mix only accounts for 10 percent of your credit score, but that amount can make an impact if you’re in good standing everywhere else. Your payment history carries the most weight towards your credit score at 35 percent, your total debt is second at 30 percent, and length of your credit history is third at 15 percent. If you don’t have a robust credit history for example, your credit mix could have a larger role to play in the calculation of your credit score.Reconsider opening a new credit account if you’re frequently late or missing payments on your existing accounts and carrying a balance every month. Focus on improving those negative financial habits first and then consider opening new accounts to diversify your credit mix.
Not having a ‘good mix’ of credit doesn’t mean you have bad credit. As long as you’re paying your existing accounts on time and not carrying a balance, your credit score will naturally improve. However, you’ll find it difficult to join the 800-score club until you have all account types on your credit report.
If youris above 670, you’ll likely qualify for competitive interest rates regardless of how many account types you have. So don’t sweat the credit mix you already have, it’ll gradually increase over time.
Less is certainly more when it comes to finding the best credit mix for you. Having all three account types in your report will boost your credit score, but only if you have good financial hygiene already. This means that finding the ‘perfect’ credit mix is entirely custom to you and how many account types you can manage responsibly. Before attempting to find the best credit mix, ensure that your payment history is solid and you’re not overwhelmed with the number of existing accounts you have already. Improve your credit score by consistently making your monthly payments on time and monitoring your credit score often on ClearScore. It’s free, forever.
Tassie heads up ClearScore Canada. She lives in Toronto with her husband and two young boys. In her free time, she can be found at the family lake house or playing ball hockey.