Many people don’t necessarily realize that among the factors that can affect your credit score is your credit mix. What exactly is a credit mix? Your credit mix refers to the different kinds of accounts that appear on your credit report. So, for example, a mortgage, a car loan, credit cards—these different types of credit accounts combine to create your overall credit mix.
When you apply for a loan, lenders tend to like to see a healthy credit mix on your report. This, in turn, shows that as a borrower, you have been able to handle and accordingly manage various account types.
In this article, we review a few of the different types of credit accounts that may appear on your credit report and therefore go into creating a more diverse credit mix.
Different Types of Credit Accounts
Let’s say that you have a couple of credit cards. And you are diligent about paying those on time every single month. This is undoubtedly a good thing and will benefit your overall credit score. However, if these are the only credit types, you have open, this does not show much of a credit mix. And this could potentially be looked upon negatively by a lending institution. It is thus vital to make sure that you have a decent credit mix. Among the primary types of credit accounts that you can have are:
Revolving Debt Accounts
The most common types of credit accounts people have are revolving debt accounts. These are accounts where you borrow up to a certain amount and then pay that back, most often every month. The balance that you carry is subject to interest. A revolving account is commonly associated with a credit card, or it could also be a line of credit. Again, the important thing here is to make sure that you pay your debt on time every month and not fall behind. Falling behind is detrimental to your credit score.
Installment Loans
An installment loan is usually a lump sum loan that you pay back over a set period with agreed-upon terms. There is almost always interest associated with installment loans. An excellent example of this kind of credit account would be an auto loan. Once the loan is paid back in full, then that account would be effectively closed. As with revolving debt, you want to make your payments on time.
Mortgages
Mortgages can vary slightly from installment loans in that there are a couple of different ways that interest works with a mortgage. You can have a fixed interest rate that remains the same throughout the life of the loan. Or you can also have a variable interest rate. Variable interest rates change by the terms of your loan and the status of interest rates nationwide.
Should You Maintain a Diverse Credit Mix?
Carefully Managing your finances is crucial. Lenders like to see that you have different types of accounts open and consequently pay on those accounts according to the stipulated terms. However, this is not to say that you should go out and open different account types that you currently do not have.
While a credit mix can be essential, it is generally considered a smaller factor in the grand scheme of your overall credit history and score. A lender primarily likes to see that your accounts are up-to-date and being paid on time. They will thus examine your credit history closely. They are also looking at the length of your credit history. Another critical factor when evaluating a loan application is your credit to debt ratio. If you owe a great deal on multiple credit accounts, this could be a red flag for any lender.
Maintaining the perfect credit mix and ensuring that you have a satisfactory track record can be a bit of a balancing act. It’s important, first and foremost, to understand where you stand with your overall credit report. Checking that report regularly can help you improve your credit score.
First Union Lending is Here to Help
We offer a wide variety of business loan programs for companies across the United States. With short-term loans, lines of credit, and equipment financing, we have a solution for you. If you are struggling with your credit score, we might still be able to help you get the cash you need for your business. That is because, unlike traditional banks, we take a big-picture approach. This means we are not just fixated on one number or one score. We genuinely want to know about you and what value you bring. Call today, and let’s get started.