Why You Might Want to Mix Up Your Credit

Looking for a way to save thousands to tens of thousands on your car loan or mortgage? One of the best ways to save is through lower rates. And the best way to get the lowest rates is to improve your credit score. Ideally, that means getting it up to at least 730 if you want the absolute lowest offers.

For example, let’s say you’re purchasing a $425,000 home with a 20% down payment. It’s a fixed-rate mortgage, paid over the course of 30 years. If you have an interest rate of 7.499% with a credit score of 690, you’ll pay $515,850 in interest alone over the course of your loan. But if you have a credit score of 760 that earns you an interest rate of 6.93%? You’ll “only” pay $468,461 in interest over the course of the mortgage.

That’s a savings of $47,389 — probably one of the biggest deals we’ve ever talked about on KCL! And it all hinges on your credit profile.

When it comes to your credit score, there are five key factors that go into the calculation. Today, we’ll be highlighting one that makes up 10% of your credit score: your credit mix.

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How important is credit mix, really?

Credit mix isn’t the most important part of your credit score. But it’s still up there.

Here are the five factors that most prominently influence your credit score in order of importance:

• Payment history makes up 35% of your credit score.
• Credit utilization constitutes up to 30% of your credit score.
• Length of credit history is up to 15% of your credit score.
• Credit mix makes up 10% of your credit score.
• New credit makes up 10% of your credit score.

While it’s not the number one item on the list, 10% of your credit score is still a ratio worthy of consideration.

Related: Best Cash-Back Credit Cards in 2023 for a Happier Wallet

 

How do I mix my credit? That sounds complicated.

It’s really not! Credit mix just refers to how many types of credit you’ve proven you can responsibly handle. The more experience you have with a wide variety of products, the better.

There are two main types of credit: revolving credit and installment credit.

Think of revolving credit like a revolving door.

Revolving credit is a credit line you can hit up when you need it. You don’t constantly owe money on it unless you’re constantly borrowing.

Examples of revolving credit include:

• Traditional credit cards
• Store credit cards
• Personal lines of credit
• Home Equity Lines of Credit (HELOCs)

Let’s take the type most people are familiar with: credit cards.

Think of your credit card like a revolving door. No one’s forcing you to swipe your credit card every month, so when you don’t borrow, you won’t owe the bank any money.

But when you do walk through that revolving door and use your credit card to borrow money, you’ll have to pay it back with interest. On credit cards in particular, these interest rates tend to be pretty high.

Let’s say your card comes with a credit limit of $1,000 and you’ve maxed it out by spending every last penny of that limit.

You don’t get to walk back out of the revolving door until you’ve paid off some of your balance. You’ll still have your line of credit when you’re done paying off your balance in full. After that, you won’t owe any monthly payments until you’ve walked back through that revolving door to borrow more money from your $1,000 credit line.

Personal lines of credit and HELOCs work in a similar manner, though the interest rates tend to be lower.

 

Go for fixed-rate installment credit.

Installment credit is way more predictable. You’re generally borrowing a large sum of money up front, and you’ll pay it down in relatively predictable monthly payments until your entire balance is paid off.

There’s no revolving door, though. Once it’s paid off, you won’t be able to borrow more unless you apply for a brand-new loan.

Examples of installment credit include:

• Auto loans
• Mortgages
• Student loans

Installment credit can come with fixed or variable interest rates. Ideally, you’ll go for fixed rates, as they’re more predictable. With variable rates, your interest can go up or down over the course of your loan.

While there might be upsides if rates go down, predicting the future is generally not a good game to play. That is unless you’re Ms. Moneybags and absolutely know you can afford major rate swings or pay off your loan balance super early.

If you’re an average, everyday American and rates go up dramatically, you could quickly find yourself unable to make payments. This will negatively affect your payment history, and that makes up 35% of your credit score.

 

 

Don’t expect all loans to be accounted for in your credit mix.

Not every loan you take out will count towards your credit mix. If the lender isn’t reporting your (hopefully) on-time payments to the credit bureau, it’s not going to help you one bit.

Lenders that commonly don’t report payments include payday lenders and issuers of title loans. There are a million other reasons you should avoid these types of loans like the plague, but that’s a discussion for another day.

 

Whether or not you should apply for new credit to shake up your mix depends.

Here’s what you shouldn’t do: upon discovery that your credit mix affects 10% of your credit score, do not go out and apply for a million new loans and credit cards. When lenders see too many new inquiries on your report in a short period, it’s a red flag to them. It may signal you might be going through financial duress, whether that’s what’s actually happening or not.

However, if it’s been a number of years since you’ve taken out an installment loan and you need one for a car or other big personal expense, taking out a loan you can reasonably afford may help your credit score.

If you’ve never had a credit card before, but you’ve been thinking of opening a new credit card to travel hack, doing so might ultimately boost your credit mix and overall score. But that is if, and only if, you’re making on-time payments and not digging yourself into debt.

 

You can get a good score without mixing up your credit.

It’s not absolutely necessary, though it will help on the margins.

For years, I refused to engage with revolving credit products like credit cards, and my credit score was still north of 730 based on my installment loans alone. When I eventually did apply for my first credit card, I had no issues doing so.

That said, everything else on my credit report was pristine. If you’re trying to combat negative line items on your credit report, attack from every angle you can, but prioritize. Remember that making on-time payments and keeping a low rate of credit utilization will help you far more than adding different types of credit. Though that could potentially help a bit, too.