An excellent credit score hinges on multiple factors, and a credit mix is one of them, which, in brief, is a blend of different types of credit you have, making up 10% of your credit score, a three-digit number. While the payment history, which makes up 35% of your credit score, plays the biggest role in evaluating your credibility, a poor credit mix itself is enough reason for a lender to turn you down, despite careful handling of your existing loans.

Although it is not as significant as other factors, a diverse set of loans could give a boost to your credit score. At the same time, it is not advisable to open a new account to improve this factor because the impact of hard inquiries is much stronger, and not be forgotten the risk of missed payments.

A lender does not peruse your credit file in order to know the score that credit reference agencies calculate based on information recorded in your credit report, because they employ their own methods to do so. They would rather go through your report in order to fetch information such as payment history, types of credit you have, hard inquiries and the like.

Credit mix is also taken into account as it demonstrates how responsibly you can manage multiple types of debts. For instance, if you are applying for a mortgage, an instalment loan, a lender would check whether you ever took out a personal loan in the past to see whether you can manage debts to be paid over an extended time period. Having no such details does not lead to rejection of your application, but you will certainly be charged high interest rates.

What is called a good credit mix?

There is no thing like a perfect credit mix. Your excellent credit score is not a reflection of responsible debt management, so the focus should be only on having one type of revolving credit and one type of instalment credit. Credit mix is a factor that evolves naturally as you make financial moves throughout your life.

Instead of focusing on which type of credit to open, you should decide whether you have a strong repaying capacity to discharge them once and for all, and on top of that, is there an urgent need for borrowing money?

Ways to improve your credit mix

Having said that before, your credit mix is unlikely to be a deciding factor on the approval of your loan application, so it is not necessary to open a new card for the sake of improving your credit mix. However, diversifying could help you take your credit score to the next level. With that in mind, here are some ways to improve your credit mix:

• Apply for a loan only when you need it

Having multiple types of credit and being able to pay them off on time are two different things. Diversifying your credit mix should not be at the cost of your budget. Just because your credit file does not have a record of multiple types of credit, it does not mean that you should open a new account.

Experts suggest that you borrow money only when it is urgent or you cannot until some savings. Do not forget that you have to pay interest on top of the money. There is no point paying this much money when you never need money in the first place. Take into account the impact of hard inquiries as they continue to show up for two years and influence your credit points for this long period. The benefit you receive by discharging your obligation in full would be relatively smaller than the damage you will experience as a result of a hard check.

Your credit mix will already be ameliorated when, in the future, you would be taking out an auto loan or a mortgage. Your credit score doesn’t need to be calculated poor if your credit mix is not diversified. Your overall financial situation will decide whether you should take out loans for fair credit with guaranteed approval or loans for bad credit.

• Become an authorised user

Becoming an authorised user will benefit those who are looking to build their credit score from scratch. Until you have some credit history to demonstrate, it could be quite challenging to apply for a credit card. Fortunately, you have an option to become an authorised user of someone’s credit card. Credit card bill payments will also show up on your credit card. This will help boost your credit mix, provided you take out an instalment loan down the line.

• Avoid frequent credit inquiries

Applying for a new account in a short period of time will damage your credit rating, even though you have a diversified credit mix. Frequent credit applications demonstrate that you often rely on your loans and credit cards in order to meet your expenses. Desperation will call your credibility into question. As a result, you will most likely be rejected or, otherwise, charged high interest rates.

What does credit mix include?

Credit mix includes revolving credit and instalment loans. Revolving credit is an umbrella term for credit cards, retail credit cards, home equity line of credit, and personal line of credit. They all come with a certain amount of limit that you can keep using over and over, provided you pay off the balance.

For instance, if your credit card has a maximum limit of £1,000 and you have utilised 50% of it, you have the right to use the rest £500. Once you pay off the balance, you will again be able to use £1,000. It means a line of credit remains open after the settlement of bills, unlike instalment loans.

Instalment loans, on the other hand, include personal loans, mortgages and auto loans. These loans are taken out for a fixed period of time, within which you are to discharge the obligation in instalments, fixed or variable, in case of mortgages, and once the whole amount is settled, the account will remain closed. You will have to reapply if you need money.

It is worth noting that credit mix does not include payday loans, auto loans, or buy now pay later schemes. These loans do not appear on your credit report and thereby not a part of the credit score calculation. When you make defaults on these loans, your accounts are sent to collection agencies. This cannot affect your credit mix, but collections could affect your payment history as they are reported as collection accounts.

The final statement

Credit mix includes recurring and instalment loans. Ideally, there is no such thing as a good credit mix. Either you will have a credit mix or not. The aforementioned ways can help improve your credit mix.