This is the fifth part of my Credit Series, where I explain the most important aspects of credit, credit reports, and credit scores. Each installment focuses on one factor influencing credit, tools to monitor and improve credit, or an explanation of a specific credit concept.
Account Mix counts for 10% of your credit score and measures the diversity of accounts on your report. There are several types of accounts that can be included on your credit report:
- Revolving accounts include credit cards and home equity lines of credit.
- Installment accounts (accounts that have a fixed payment for a fixed amount of time) include auto loans, mortgage loans, and student loans.
- Open accounts are less common but include cellular service accounts and other home utility accounts.
To score high in account mix, consumers need a record of experience with several different types of accounts. I am young and have only credit cards and student loans, so I am likely to score low in this category.
There are ways to ensure scoring the maximum points available for this category:
- If you have a mortgage, you are much more likely to earn more points in this category. Mortgages are very good for your account (studies show that people who have mortgages are more responsible and stable than those who don’t).
- Having too many credit cards can hurt you in this category. While the optimal number of credit cards is another FICO secret, try to have as many as you need but not more.
- Although paying in cash for a car may be cheaper than financing a car, having a car loan as part of your credit mix can help your score. Still, I don’t advocate paying finance charges just to boost your score. The advantages of improving your credit score slightly (again, the scoring models are secret so it is difficult to predict exact changes) are outweighed by the interest costs of financing, in my opinion.
- People who have finance company accounts on their credit reports can have lower scores. Finance companies can hurt your score because they are considered to be higher risk lenders who targer higher risk companies.
Although account mix is a relatively small portion of your credit score, by avoiding having too many credit cards and understanding which types of accounts will help and hurt you, you should be more aware of which types of credit are beneficial and which are not.
