The majority of the financial institutions in the US use the FICO score or credit score to determine whether you are capable of maintaining credit. Several factors affect your credit score: payment history, credit utilization, length of credit history, and credit mix.
What is Credit Mix?
You can establish your credit by applying for a credit card or a loan, and making sure you pay dues on time. Credit cards, Home equity line of credit, and personal lines of credit are called Revolving Credit. They have no set balance to be paid monthly although you do need to pay the minimum amount. You can use this repeatedly so long as you pay your dues.
Student loans, car loans, and mortgages are non-revolving credit or also called Installment Credits. This type of credit has fixed payments every month until fully paid.
A credit mix – which makes up about 10% of your credit score – is basically the multiple types of credit accounts that you own. You have good credit if you are able to maintain both installment and revolving credit.
How to Improve Credit Score?
Having multiple credit accounts and being able to maintain them increases your chances of getting approved for another type of credit. It tells financial companies how well you manage multiple accounts without missing payments. Most importantly, it can significantly improve your credit score.
If you do not have a credit account yet, applying for a credit card or a loan can establish your credit report. Do make sure that you pay your dues on time. Missing payments can hurt your credit score big time.
You can improve your credit mix by applying to different types of credit. If you have a credit card, consider getting an installment type of credit like a personal loan.
However, it’s important to also assess your financial situation. A good lender will usually work with you to get a loan that fits your budget and suits your needs. This can help you to decide whether borrowing money won’t put you in severe financial stress. Do not apply for another credit if you think that it would be difficult for you to pay your dues.
If you can prove to the lenders that you can juggle multiple credit accounts, you are highly likely to be approved for loans in the future and get better interest rates for them.
Keep in mind though there are other factors that affect your credit score. To get a higher FICO score, make payments on time. Also, make it a goal to only use about 30 percent of your available credit. High credit utilization tells lenders that you heavily rely on your credit and that will have a negative impact on your score. Title loans and payday loans are not part of the credit mix and don’t show up on your credit report. Nevertheless, do not take them for granted because collection agencies can report default payments to credit bureaus.
When it comes to credit, consistency speaks for itself. You will be rewarded with fast approvals and lower interest rates if you have good credit standing.
