How Types of Credit Affect Your Score
The types of credit you use are calculated as 10 percent of your FICO scoring formulae. The calculation looks for what Fair Isaac refers to as a “healthy mix” of credit. However Fair Isaac is not very definitive as to just what exactly this is supposed to mean.
The company does say that this does not mean that you should have a mix of loans of every possible type (credit card, mortgage, credit line and so on) in order to create a good score. In fact the company cautions you into applying for credit that you don’t need in order to boost your score as that can actually have the opposite effect especially if you apply for too much credit in too short of a time.
To achieve the highest potential scores you need to have some revolving debts (such as credit cards) and some installment debts (like a personal loan, mortgage or auto loan.) These loans don’t all have to be active (in other words you don’t have to use them!) In order to boost your score, you only have to show that you were able to manage different types of loans in the past.
So it seems that the ability to juggle different types of credit without stress or struggle is what the credit bureaus really mean by a “healthy mix” of credit.
Credit experts agree that major credit cards such as MasterCard, Visa, American Express, Discover and Diner’s Club are much better when it comes to boosting your credit cards rather than cards from a finance company or a department store. Installment loans reflect well on your credit especially if you pay each installment of the loan back on time.
According to statistics from the Fair Isaac Credit Organization (FICO), the mix of credit products already currently enjoyed by the average American which is typically four or five major credit cards and at least one loan that is paid back in installments.