Credit Report Account Mix
There are five main factors that make up your credit score. Two of them — payment history and your amount of debt account for about 65% of the points that make up your credit score. But making payments on time and keeping debt levels low aren’t the only ways to go about improving your credit score. Here, we will take an in-depth look at another important credit score category: your types of accounts (or “credit mix”), which accounts for roughly 10% of the points in your credit score. Credit scoring models want to see that you can manage all different types of financing, most notably revolving accounts, like a credit card, and installment accounts, like a mortgage or auto loan. And, if your goal is to build or keep great credit, you’ll want to understand how exactly this “credit mix” factor works.
What Is a Revolving Account? Revolving accounts are those that have a different payment each month depending on your current balance. These are accounts that you are not required to pay in full each month. You have the option to “revolve” some or all of the balance to the following month. Lenders charge you interest on the amount you revolve and this is how they make money. Some examples of revolving accounts are:
- Credit Cards Issued by a Bank or a Credit Union: These are accounts backed by a major payment network, like Visa, MasterCard, American Express or Discover. (The network’s logo generally appears on the front or back of the card.) These accounts are extremely common because almost all banks and credit unions are able to issue them to their customers. Remember, credit reports will keep a history of your accounts even if they have been closed. As such, most consumers have several of these credit card accounts on their credit reports.
- Credit Cards Issued by a Retail Store: These are accounts that are issued by the stores where you like to shop. These cards are a little different than the previous two types in that you can only use the card at the store that issued it. Some examples are Macy’s Credit Card, Target, Red Card, Pep Boys Credit Card and a Dillard’s Card. There are hundreds of other examples. Most of us have several of these types of cards, too.
- Credit Cards Issued by an Oil Company: These are accounts that are issued by a petroleum company. As with retail store accounts these cards can only be used at specific locations, almost always a gas station. Some examples are Techron (Texaco and Chevron) Advantage Card, Exxon-Mobil Smart Card, Shell Card and BP Credit Card. These cards are also very common and easy to obtain. Most of us have or have had several of these types of cards.
- Home Equity Lines of Credit: Also known as a HELOC, these are loans that allow you to tap into the equity of your home. These loans are generally easy to obtain from most reputable banks and credit unions. Since these loans allow you to access a portion of your home’s equity, the payment is determined by the amount borrowed or used. These accounts are very common in part because the interest is tax-deductible in most cases. Check with your tax adviser to see if your account qualifies for a tax deduction.
In case you were wondering, debit cards are not considered credit cards. They are essentially nothing more than a check in plastic form. As such they do not report on your credit files and will have no impact, good or bad, to your credit scores.
What Is an Installment Account? Installment accounts are those that have a fixed payment for a fixed period of time. As with revolving accounts, you are not required to pay them in full each month. You are allowed to make a payment that is going to be the same every month until the loan is paid in full. Lenders charge you an annual percentage rate (also known as an APR) and this is how they make money. Some examples of installment accounts include:
- Auto Loans: Auto loans are issued by either a bank, a credit union or by a company that specializes in automobile lending. These accounts are generally paid off over 48 to 60 months but shorter and longer terms are available.
- Mortgage Loans: Mortgage loans are issued by a bank, a credit union or a company that specializes in mortgage lending. These accounts require the most amount of paperwork during the application process and a good credit score can help you secure a lower interest rate. A lower interest rate will save you a lot of money over time.
- Student Loans: These loans, obviously, are used to pay for college related expenses such as tuition, room and board. Most student loans are federal loans issued by the federal government. Private student loans are issued by banks and other financial institutions. Student loans are a unique type of loan because most students are taking classes and not working full-time jobs. As such, the repayment of a student loan generally goes through a process called “deferment.” Deferment essentially allows the student to postpone their payments until several months after they have graduated or stopped going to school. This gives them the opportunity to secure employment before the loan requires the first payment.
- Home Equity Loans: These are not the same as home equity lines of credit (aka HELOCs). Although they both allow you access to your home’s equity, the structure of the loans are not similar. A home equity loan is a fixed amount of money that you borrow. Once you take that loan out, your payment is fixed for the duration of the payback period. A home equity line of credit, conversely, gives you the flexibility of taking out some of or the entire approved amount.
- Signature Loans: Signature loans are just what they sound like. You walk into a bank or credit union and tell them you want to borrow some money and sign a guarantee to pay it back. You don’t have to tell the bank what the money is for and you can use it for anything you like including vacations, investments, home improvements or a shopping spree.
What Is an Open Account? Open accounts are probably the least common of the three account types we’ll profile. Also referred to as “open credit,” it is a hybrid of installment and revolving credit. The payment is not the same each month and it’s usually due in full at the end of each billing cycle. The consumer satisfies financial responsibility for the account when the bill is paid in full each month. This cycle can go on as long as the consumer has an account with the service provider.
An account with a utility company is one example of open credit. A customer with an account for gas or electric service, for example, doesn’t know what their payment will be each month. As you can imagine, electric bills can vary a lot from month to month depending upon the seasons and air conditioner/heater usage, and the customer is responsible for making this varying payment each month.
Most utilities, cellular service, and some gas station cards are other examples of open credit. But perhaps the most widely known example of an open account is a charge card. Charge cards look and act like credit cards, but with one key difference: You’re expected to pay that balance off in full by the end of the month.
What Is a Tradeline? A tradeline is the catch-all for all of the credit accounts appearing on your credit reports. In other words, every single account on your credit files will fall into one of the categories above — revolving, installment or open — and all of those accounts are tradelines.
Why Does Your Mix of Accounts Matter? When these accounts report on your credit records they are coded very specifically so that not only consumers and lenders but also credit scoring models can easily identify them. Statistical analysis has determined that the type of accounts you have is predictive of your future credit risk.
So what does all of this mean to you the consumer? Consumers with the strongest credit scores, including FICO credit scores, tend to have a mix of different types of accounts. Of course, the key is to manage these accounts responsibly. Credit scoring models are looking to see if you can handle all different types of financing as they assess your creditworthiness.
Keep in mind, all of the accounts on your credit reports count, even if they are closed. Most of us have had several credit cards, mortgages, auto loans and student loans in our life so this example is probably very realistic.
There really isn’t one target “sweet spot” that we should all aim for in our account mix. That’s because your mix of accounts might be great for your score but terrible for someone else’s and vice versa.
How Can You Earn the Maximum Points for the Types of Accounts Category? You may want to consider the following strategies:
- If you don’t have an installment loan reported on your credit reports, consider whether it makes sense to get one. If you are going to borrow anyway – or if you want to consolidate higher-rate credit card debt – a personal installment loan may be helpful here. Another strategy is to get a low-rate car loan then pay it off as quickly as you can. (It will still count even if you pay it off a few months after you get it.)
- Avoid finance companies. Finance companies are commonly referred to as “lenders of last resort.” Their rates and terms are not as favorable as those offered by banks and credit unions so higher risk consumers tend to depend on them for their credit needs. As such, having a finance company account on your credit report could cost you points.
- If you don’t have any credit cards that are currently open and active, consider getting one. A credit card that’s paid on time and has a low (or no) balance can be a very valuable credit reference. If your credit scores are poor you may need to consider a secured credit card to get started. .
- Remember, you don’t want to take on financing you don’t actually need — or, more importantly, won’t be able to repay — just to beef up your account mix. The best way to score big points in this category is to add installment, revolving and open accounts to your credit file organically over-time. As you add new loans, be sure to keep track of due dates and watch your debt levels. Remember, you’ll still want to keep your payment history and your credit utilization in tact.
Credit report mistakes can lead to disqualification for mortgages and car loans, as well as increased insurance premiums and interest rates. In some cases, those mistakes can even prevent you from getting a job.
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