While learning how to improve your credit score, you may get a lot of suggestions that range from making your loan payments on time to having a diverse credit mix at hand. While the former practice is pretty simple to understand, the latter advice may bring up several questions in your mind.
Exactly what is a diverse credit mix? How do you build it? Do you need to do anything to maintain it? These are just a few of the burning questions that call for detailed answers before you can adopt this approach.
Thankfully, understanding the workings of a diverse credit mix is not difficult at all. To help you with this finance lesson, here’s an overview of why a credit mix is important for your credit score.
What is a Credit Mix?
A credit mix is a set of lending products like loans, credit cards, and lines of credit. Credit products are distributed into two categories: installment credit and revolving credit. Products like home loans and car loans are considered installment credit, while offerings like credit cards fall under revolving credit. When you have more than one type of lending product, you have a diverse credit mix. From there, you can build your credit with short-term loans and long-term credit cards, among other products.
How Does Credit Mix Affect Your Credit Score?
The FICO score is the most popular method to calculate credit scores. In your FICO score, your credit mix contributes to 10% of your final score. This means that if you have a good credit mix with different lending products, you have a higher chance of building and maintaining a better credit score. You can continue checking your credit score through free credit reports to see how this approach improves your financial status for lenders, employers, landlords, and other third parties.
How Do You Get a Good Credit Mix?
Since credit is distributed into two main categories, installment credit and revolving credit, a diverse credit can be as simple as having one lending product from each category. This means that having a home loan and a credit card can serve the purpose of diverse credit. However, you can have several lending products in your name, in addition to general banking products like a high-yield savings account.
How Do You Build a Credit Mix?
While anyone can take out loans and credit cards, it’s important to consider important factors before borrowing money. First of all, you should know that applying for any type of lending product can impact your credit score for at least a year, while the “hard inquiry” that lenders make may stay on your credit report for up to two years. Besides this crucial aspect, you should also remember to borrow and utilize only as much money as you can afford to pay back.
Once you have grasped these concepts, you can apply for at least one installment credit product and one revolving credit product. This gets you started on the way to improving your credit score through a diverse credit mix. At the same time, you can continue using solutions like an investment app to continue building a strong financial foundation for yourself.
How Do You Maintain a Credit Mix?
After you have signed-up for enough lending products, you should make it a point to maintain them all without failure. Here, it helps you to learn how to strengthen your financial knowledge to steer clear of any trouble on your credit report.
You can use the following tips to properly maintain your credit mix.
Don’t Delay Your Payments
As mentioned earlier, making payments on time still stands out as the biggest factor to influence your credit score. You should stay vigilant about this practice and never miss a payment for your loans, credit cards, or lines of credit. You can use solutions like reminder apps to stay on top of your bills.
Maintain Low Credit Utilization
For your revolving credit products, make sure to utilize only a portion of the approved amount. While the recommended ratio is less than 30% of your credit, you should keep it as low as possible. You can use solutions like a subscription management app to reduce unnecessary expenses.
Get a Higher Credit Limit
You can easily decrease your credit utilization by getting a higher credit limit for your credit cards and revolving credit accounts. But sometimes, getting higher credit can impact your credit score. You should ask your bank if they can increase your limits without a hard inquiry.
Clear Revolving Account Balances Each Month
When you pay your outstanding balances in full for your revolving credit accounts, it helps you improve your credit score and maintain it in the long run. You can pay off your balances before your statement date to save yourself from high interest.
With this information, you can understand the role of a diverse credit mix while also learning how to maintain it. This can help you build an ideal credit score to improve your financial status.
