How Your Credit Mix Can Help Your Score
When credit bureaus are determining your score, they factor in several things. Your credit score in Canada is from 300 to 900, and the average is about 670.
The higher your score, the better the interest rate you’ll probably be offered. There’s a few other things considered outside your score, but that’s the basics of credit score benefits. Other factors considered beyond your score when applying for a loan can include your income and your debt utilization when reviewing an application.
Having credit diversity like loans, credit cards and other products that are managed well is another way of showing creditors and lenders you can handle credit responsibly.
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Credit Score Basics
Before we can get into how your credit mix can help you with improving your credit score, we need to cover some basics. The credit bureaus in Canada (Equifax and TransUnion) use a few factors when the create your credit profile and try to come up with your score.
The main factors of your credit score include payment history, amounts owed, length of credit history, types of credit used, and new credit. The payment history is how well you make payments. Are they on time or late? The amounts owed looks at credit available versus what you’ve used. The length of credit history is about how old your accounts are on average and age of oldest. The new credit would be how recent and how often new credit has been applied for.
The types of credit used (e.g. credit cards, lines of credit, personal loans and mortgages) that you have and is also referred to as your credit mix.
Other factors that can also be considered are derogatory remarks about your accounts such as bankruptcy or consumer proposal or errors. Which is also why you need to not just know your score but to also monitor your report for accuracy. Any errors on your report could affect your score. If you were to find some, getting them fixed can be a small boost.
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Types of Credit Mix
Installment Loans – personal loans and installment loans are practically the same. They are loans with monthly scheduled installment payments. The main difference being that personal loans are harder to qualify for and might come with longer terms and lower interest rates. To qualify for a personal loan will depend on your credit score. Those that do not qualify can apply for installment loans instead. Practically any loan that is paid by regular payments can be considered an installment loan. Home loans and car loans are also similar, but secured loans with collateral.
Revolving Credit – this is a type of account where you are preapproved up to an amount or limit and you are free to draw up to that amount. So long as you make your payments on time and keep your account in good standing, you would be free to draw from the account again any remaining credit available to you. Common examples being credit cards and lines of credit.
While there are credit cards, it is important to note that retail store cards and gas station cards or looked at as different types of a credit mix, even though these are also credit cards.
Home Equity – a home equity line of credit (HELOC) is a secured loan where your home provides collateral. Installment loans are typically unsecured. This provides another type that can add diversity to the mix of credit options.
Types of loans that would not be considered for your credit mix are payday loans and title loans, which are truly last resources due when you’ve tried all other options.
Lenders and creditors like to know how you might be able to handle or manage different types of credit over time. This gives them an idea of your ability to use credit and what sort of risk you might be for them if considering your application.
Basics to Improve Credit Score
Paying your bills on time is an important part of your credit score. Your payment history makes up the largest part of your score (35%) and isn’t limited to whether bills were paid or not. It also considers how long they may have been unpaid, and how often it happens.
How much credit you have available to you and how much is owed is your credit utilization rate. Should you be looking to borrow in future, already owing too much can create an issue. It is best to keep this under 30% at all times. Even less if possible, so it’s important that you maintain and try to fix your debt overall. To really have your best chance of getting a good credit score and all its benefits, you should be a sponge for information on the topic. Since your credit score is a key to your personal finances and can affect you in many ways, it’s strongly advised to take an interest in how to improve and maintain your score. Read more about how you might improve your score and how to start taking charge of your credit profile.
If you are ever creating new credit inquiries (hard checks) it is best to limit this, and keep within a short time frame. Credit bureaus understand when a consumer is comparing, there can be a window of a couple weeks. But if you continuously have credit checks it can have a negative impact on your score.
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The key to having a good credit score is to not just take care of it when you need it, but to always take care of it so it is in good shape when you do need it. Since your score isn’t something that can be quickly or easily fixed, giving it regular attention is in your best interest.
Monitoring and managing your profile will help to maintain a good credit score for personal loans or whatever you might need it for in future. If your score isn’t managed, your only options might be high interest bad credit personal loans which tend to be a very costly way to borrow.
While the credit mix might not be the most influential part of your score at 10%, it isn’t easy to find ways that can improve your score. The best approach is to make use of all aspects that can contribute to improving your score. If your long term goal is to get an excellent credit score so you are eligible for the best rewards cards, introductory offers and preferred rates on loans, your credit mix should be part of your plan to get there.
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Megan Kelly
Wizard of words, macchiato maven, soothsayer, naysayer, aspiring wordsmith and Head of Content Marketing at GoodCheddar.