One of the least understood components of credit scoring is the 10% of the formula that is dedicated to credit mix. Fair Isaac rewards consumers who maintain an ideal mix of credit accounts.
That statement also begs the question, “what is the ideal mix of credit?” The answer is unclear, since this may be one of the closest guarded secrets of the FICO credit scoring models.
There are some essential credit records if you want to maximize your points in this category.
First, at least one installment loan account is needed to break into higher score territory. Installment loans can be an unsecured personal loan. Secured loans, such as automobile loans can add valuable points to a credit score. A mortgage loan will give you the most benefit, since it is the largest expense most consumers will ever have.
Revolving lines of credit also provide a broad perspective to credit scoring. Store cards provide minor benefit. Major credit cards provide the biggest boost to credit mix, since they are one of the more difficult types of credit to maintain in good standing.
There are some types of credit that do not contribute points to credit mix. Having too many finance company accounts will actually deduct points, even with perfect payment histories on them. Payday loans never even show up unless you fail to repay them according to contract. Similarly, cellular phone and utilities contracts can hurt you but will never help you.
Although no specific information has been released by Fair Isaac, it is safe to assume that having at least one or two installment loans and one or two major credit cards in your credit history will provide enough information to warrant a higher number of points. You can lose points by having too few revolving accounts or too many. Most importantly, don’t open accounts just because you are trying to build a mix of accounts. Other credit scoring components contribute much more to the credit scoring formula, so your plan could actually backfire!
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."